How to draft an excellent operating agreement

By now, you should realize that your operating agreement is an essential company document, one of the most important ones you'll ever draft. Take the time to learn about and understand the critical essentials you need to make your operating agreement the best it can be.

Refrain from using a poorly drafted agreement from an unknown source that is deficient or contrary to state law. It will leave you and your business open for trouble down the road.

How long should an operating agreement be?

In general, you want to strive for brevity and clarity. You want the shortest, most concise agreement for your situation, but not at the expense of necessary detail.

Your operating agreement must address several key issues. Therefore when it comes to length, your operating agreement must be long enough to handle all the significant issues: management structure, membership, governance, tax, voting, profit and loss allocations, and other vital matters.

Remember: your operating agreement is a practical, living document that serves as your company's user manual. Avoid operating agreements that are too short. Brevity is essential, as is clarity, but never at the expense of supplying sufficient detail and meeting its essential purpose.

Should you use an operating agreement from another LLC?

You may think you can use another LLC's operating agreement and adopt it. But using someone else's is the worst decision you can make.

Your agreement must be tailored and customized for your business, different from what was negotiated and designed for someone else's.

Your best option: Use a model agreement form from a trusted source, preferably drafted by an attorney experienced in LLC matters and used by them in their practice.

Should an attorney review my operating agreement?

If there is one area where you will get your money's worth paying an attorney, it's having one who'll review your operating agreement before adopting it.

Remember: one benefit of a limited liability company is its flexibility. You can set it up custom-tailored to your needs.

But flexibility can create complications!

Therefore, to avoid future misunderstandings and have peace of mind, ensure your operating agreement addresses all relevant contingencies, and this is where an attorney earns their fee many times over.

At the very least, if resources are limited, and you can't afford an attorney, take the time to learn everything you can about drafting an operating agreement and thoroughly prepare and review your operating agreement before adopting and signing it.

Bottom line: an ounce of prevention is always worth a pound of cure!