Operating Agreements and Shareholder Agreements

An operating agreement is a document that describes the rights and obligations of each member of a Limited Liability Company (LLC), defines who is authorized to take what actions, and identifies the managers of the company – the person, or persons, responsible for conducting the day-to-day affairs of the LLC.

An operating agreement should contain terms that limit the authority of the manager to take certain actions, and require unanimous or close to unanimous consent before certain actions may be taken. A well-drafted operating agreement will also contain dispute resolution procedures, allowing for disputes to be resolved expeditiously and inexpensively; buy-out provisions that define when and how a member can be removed, and how their share of the company will be valued in the event of their departure should be included as well.

A shareholder agreement is the same kind of document as an operating agreement, only it applies to corporations as opposed to limited liability companies. Rather than identify members and managers, a shareholder agreement identifies the shareholders, officers, and directors of the corporation. A well-drafted shareholder agreement will also spell out the rights and obligations of officers and directors, the duties of and limitations on the authority of the Board of Directors, how meetings can be called and held, and buy-out provisions for a departing shareholder.

Crafting an appropriate agreement starts with collaboration among the owners on which issues they wish to see covered in their agreement, followed by a meeting between the owners and counsel for the company, then drafts of the document circulated among the owners until final revisions are settled upon. The most important aspect of the agreement is that it be tailored to your particular company’s needs. There is no such thing as a form agreement that will work for all companies and situations.

Do you need an operating agreement or shareholder agreement in order to run your company? The answer is: It depends. If your company is owned and operated solely by one person, then there may be little need for a formal agreement. However, if your company is owned and operated by more than one person, then it is highly advisable that your company have such an agreement. The reason why is because operating agreements and shareholder agreements reduce the opportunity for conflict, and significantly reduce legal and other costs if a dispute between arises.

Few things can be more devastating to a company than conflict between owners, especially if the conflict spills into court. An operating agreement or shareholder agreement reduces the number of things to fight over. If the agreement is well written and tailored to your company, then it will provide the answer to several types of issues and disputes that can arise. The agreement also provides a clear road map for a judge or arbitrator as to what the parties intended when they organized the business.

When there is no written agreement that can be consulted, people can, will, and do make up all type of stories about what the parties had intended and agreed upon. This leads to protracted and costly legal disputes which are difficult to predict. On the other hand, when you have a well-drafted document that clearly spells out the parties’ agreements in black and white, the opportunities for significant conflict is reduced, which means costs are reduced, and owners are incentivized to think long and hard before they take positions that are contrary to the written document.

If you think you might need an Operating Agreement or Shareholder Agreement or you are involved in a dispute over one, call us at
480-536-9991. We will conduct a thorough review of your situation and recommend the best course of action.

 

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