4 Potential Issues to Proactively Address in Your Operating Agreement

When creating an operating agreement for a limited liability company (LLC), members should attempt to proactively address potential future issues with the business. Sometimes unavoidable events happen, and if your operating agreement is silent on the most common issues, your business members will be left scrambling to try to amend the agreement after the fact. Having a solid operating agreement that provides for common situations ensures that your business will have a solid plan in place if these events occur.

1) Buyout

Having a buyout clause is important in the event that one member wishes to leave the business for any reason. If one of the members is terminated, died, becomes disabled, or is otherwise no longer going to be a part of your business, a buyout clause gives the remaining members of the business the option to buy out the leaving member. This section of the operating agreement should detail the buyout procedure, price, and payment terms, as well as any other provisions the members think are useful.

2) Non-compete

Another great provision to have is a non-compete clause. This clause essentially states that, should a member leave the business, they are prohibited from taking another job or starting another company that is in direct competition with the business of the LLC for a certain period of time. Caution should be exercised when drafting this clause however, as non-competition clauses must be written to be limited in scope of activities, time frame and geographical dimensions to be directly related to the business interests of the LLC.

If, for example, the LLC operates a convenience store and there are 15 convenience stores in a 5-mile radius of the location of the LLC’s convenience store, a court is not likely to support a state-wide ban on working in a convenience store that lasts for 10 years. The convenience store that the LLC operates already has plenty of competition and keeping one member from starting or working at one more convenience store is not directly related to business interests of the LLC. Under Virginia law, one failure in a non-competition clause means the entire clause fails, so these restrictions need to be well-thought out. Also, know that non-competition law varies from state-to-state and that state law should be considered before writing anything related to non-competition.

3) Dissolution

At some point in your business, you or another member may decide to dissolve, or the business may fail. Having a solid dissolution clause in your operating agreement will ensure that the procedures for dissolution, including what will trigger a dissolution, are laid out in detail.

4) Amendments

Chances are, your operating agreement will need to be amended at some point during the life of your business. A clause that describes how the agreement can be amended, the votes required to pass an amendment, and other pertinent information should be included in your agreement. It can also be useful to include “adverse effect” language that details what actions members who are adversely affected by the amendment can take.

Over 25 years of experience representing business owners and veterans

We are dedicated to helping business owners, especially those who are veterans, become successful. With over 25 years of experience, Wilson Law Group, PLC, offers free consultations and reduced fees for veterans. If you are a veteran who is interested in starting your own business or receiving legal help for an already-established venture, please visit us online at www.wilsonlawgroup.net or contact our office at (804) 864-5268.

The following two tabs change content below.

Wilson Law Group

Jim Wilson is the founder and principal attorney of the Wilson Law Group. For the past 25 years he has been combining legal dexterity with an entrepreneurial mindset to help aspiring and established business owners start, finance, buy, sell, and run their companies.

Latest posts by Wilson Law Group (see all)