Drafting an operating agreement in Colorado is a key function of a healthy business. No matter how big or small your business, you need to be sure that everyone knows who is responsible for which business functions to prevent disputes and wrangling over legal issues related to the company. This kind of agreement can be used by various kinds of companies and is not just essential for LLC business types.
If you have never drafted an operating agreement, you might not be sure what needs to be in this kind of document. There are some key components that need to be included in your operating agreement for it to be useful for your business purposes. Knowing what to include in this kind of legal business document matters, and you will be much more likely to create an effective operating agreement armed with this knowledge.
What Needs to be Included in a Drafting Operating Agreement in Colorado?
· Distributions
Distributions of the income that flows through your company can be one of the areas where strife crops up from time to time. You will need your operating agreement to be clear about who receives which portion of the earnings, and at what times, from the business so that there is no confusion and there is no fighting over the money that is coming into your business. Alternatively, if no distributions are to be made that should be stated as well.
· Capital Contributions
Determining who will contribute what money to a business can be key to a successful company that is well-managed. Every stakeholder needs to know what their income contribution requirements are, and they need to be required to stick to these contribution requirements throughout the life of the company. If someone only owns a small share or minority stake of the company, they will not be likely to need to contribute more than their fair part of the costs for operations each year. Owners can agree ahead of time whether they will require each other to make additional capital contributions during the life of the business and the consequences for not doing this. The structure of how a company plans to raise money can affect how the capital contribution and distribution sections are drafted.
· Voting and Major Decisions
Voting power and major decision-making power needs to be outlined in your operating agreement as well. Think about the chaos that could be caused by being unclear about who is allowed to vote for things like sales, distributions, or changes to the way that the business operates. You will find that this is one of the areas that you will need to define very clearly with your documentation to avoid issues that could cause the company to fail or to be dissolved. Additionally, a list of major decisions can be agreed to for what actions will require the vote of the majority or all of the shareholders. These are sometimes called minority protections. Owners or have a majority share of the equity will likely want to have the ability to make the serious decisions on their own.
· Buy-Sell and Transfer Provisions
Not every company will have more than a few owners, but even if you just have a couple of people involved in the process of choosing who to buy, sell, or transfer ownership to, it can be useful to have this part of the operating agreement correctly documented. If someone dies, if they choose to leave the company, or if their interest in the company changes, you will need to hold a vote to alter the company’s operating functions.
Without clear voting and decision-making provisions in place, your business can flounder unnecessarily. You should also consider whether or not you will allow spouses or family to inherit the shares of company founders or owners. This can greatly change the way that a business is managed and operated in the future, and some companies do not allow this transfer of ownership rights to other people who did not found the company.
· Dispute Resolution
Since company ownership can cause lots of disagreements along the way, having provisions for how to handle company disputes can be essential. You will want to follow a fair and complete process each time there is a dispute about how to manage or run the company to avoid problems that lead to the business being undermined from within. Disputes are going to happen from time to time, and pretending that they will not is naive of business owners.
Make sure that you have a dispute resolution process in place to avoid conflict that can cause the business to lose money or even falter completely over time.
· Non-Compete Clauses
Many industries use a non-compete clause to protect their interests in the business that they have created. If one of the owners or founders wants to leave the company, they will usually need to sign a non-compete that states that they will not open a business that can undermine yours in the future. This can make all the difference when it comes to the longevity of a business, and you should never assume that your other business owners will not take advantage of your generosity if you don’t require this kind of courtesy. There have been recent changes to Colorado non-compete law so an attorney should be consulted to ensure the enforceability of your non-compete sections.
· Dissolution
In some cases, businesses need to be closed completely in order to satisfy all of the members of the company. This is not the usual way that a company is managed, and many businesses will sell their shares to other people when founders or owners wish to leave the company. However, in some cases, dissolution of the business itself is required. You will want to be sure that the company can be dissolved in a legal way that does not cheat anyone out of their invested dollars, if at all possible.
Creating an operating Agreement is Essential to Business Health
Creating a business operating agreement is key to the well-being of your Colorado business. There are many kinds of information that you can include in this agreement, and all of the information in the document will help protect your business’s longevity and health over the long run. Deciding with the other stakeholders how major decisions will be made and ensuring that fair and legal processes will be used to make determinations for the business can improve the operation of your business greatly.
Drafting an operating agreement can be a lot of work, and you might want to be sure that you secure the help of a legal expert with this process. You will find that creating a legal document of this kind can be much easier if you have the expert guidance that you need. Being armed with more information about how this document should read and what it should include will be very beneficial even if you have an expert make the document for you. For a broad checklist on things to consider when forming a business, read our Legal Issues to Consider When Forming a Colorado Business article. Let the team at MW Legal Group help you craft crucial business documents. For further details, connect with Miles Williams at miles@mwlegalgroup.com
