The Operating Agreement: The Centerpiece of Your Business
An operating agreement is a written document that dictates how a company will be operated and who is going to be operating it. As a result, an operating agreement should be comprehensive in an effort to address the various decisions and procedures companies typically face. Remember: A properly formed business is a separate legal entity apart from the owners themselves. So a set of rules are needed not only to dictate how the owners interact amongst themselves, but also how each owner interacts with this “separate legal entity,” the company.
Fortunately, New Jersey’s “Revised Limited Liability Company Act” sets forth the scope, function, and limitations of operating agreements (see e.g., N.J.S.A. 42:2C-11 through N.J.S.A. 42:2C-13). By way of example only, operating agreements dictate company formation, location, membership, contributions, accounting, tax matters, resolution of disputes, dissolution, winding up, and many, many other issues. Such mandates help prevent subjectivity, self-dealing, misapplication of company funds, and compliance with the law.
Not long ago, operating agreements were merely recommended for new businesses. They are now essential. Indeed, they are unquestionably the centerpiece of any business. Every decision that is made, and every practice that is employed, should be in conformance with a written rule that has been spelled out ahead of time. This is the function of an operating agreement.
If you are forming a new business, or if you have an ownership interest in a business that does not have an operating agreement, you should consult with an attorney who specializes in business law to have an operating agreement drafted for your company. If your company is subjected to scrutiny, criticism, and claims of impropriety — and if you do not have an up-to-date, comprehensive operating agreement — you will have very little to rely upon when arguing that you have conducted yourself and your company appropriately. However, if you have operating agreement that reflects best practices, and if you demonstrate adherence to those best practices, your company will be much more likely to withstand scrutiny, criticism, and claims of impropriety. And it will run much more effectively.