Dr. Adrienne B. Haynes, Esq.

When you start an LLC (Limited Liability Company), most states will require the preparation of an operating agreement. An operating agreement is an internal document that outlines the legalities around business ownership, including equity divisions, management, decision making, and exit provisions. Missouri requires that limited liability companies create an operating agreement to address “the conduct of the business and affairs of the limited liability company, its rights and powers, and the rights, powers and duties of its members, managers, agents or employees.” (RSMo §347.081)

In the operating agreement, the provisions should respond to your state’s corporate laws and ensure that key information is not documented only in your mental hard drive as a founder or leadership team. Some of these key decisions include:

  • Who owns the business?
  • What is the business purpose and primary activity? 
  • How are decisions made as a leader or leadership team?
  • How and when can owners take money out of the business?
  • How are new owners brought in?
  • How can owners transition out? What happens if there needs to be a vote out or removal of a partner?
  • What happens to one’s ownership stake in the case of disability, divorce, or death?
  • Who is the appointed “winding up person”?
  • How will tax obligations be managed? 

Whether the business is owned by one person or several, taking the time to develop an operating agreement gives the founders time to consider important business decisions and details, and to put them in writing. This process minimizes the guess work in conflict, making it easier to make, grow, and have trust in the relationship. This is also why it’s important to work with legal counsel to ensure your wishes are properly reflected. Many early entrepreneurs use operating agreements found online, only to find that their key document is written for another state’s laws, allows business conduct they would prefer to prohibit, or is silent about important legal rights or obligations. Without a customized document, in the case of triggering events, the law may dictate how your final business decisions are made through statutory defaults.

An operating agreement is a guiding document for major decisions between business owners and includes business owner preferences when they may be unable to communicate their final wishes. When you start a business, it’s also the right time to consider succession and exit planning scenarios and appropriate documentation. 

Once you get your operating agreement prepared, please sign it! You’d be surprised how many businesses pay for good legal counsel, only to leave the long-negotiated agreement without the necessary signatures. Lastly, even when you have all of your “i’s dotted and t’s crossed”, it’s important to have all of your business agreements reviewed every 2–3 years to ensure that they are still consistent with the law and with the way you want to do business.

The next SEED Law workshop, Contracts in Your Business, will be hosted on Wednesday, April 8th from 12-1 pm on Zoom. A business is only as strong as its relationships, and those relationship details should be documented in writing. This session will provide owners with a legal perspective on how to plan, review and prepare the key documents for your business, including governing documents, vendor agreements, team contracts and more. Looking ahead, the next workshop, Recruiting and Hiring Considerations, will take place on Wednesday, May 6th from 12-1 pm on Zoom. To register for free and see the full list of virtual and in person events, please visit https://showmenetwork.org/calendar/

This article is an overview of formation decisions, including governing documentation and key terms, and does not cover every legal right or obligation, consideration, exception, or restriction. These documentations and decisions are complex and should be well researched and discussed with a legal professional before being made.

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Thanks for reading!

My name is Dr. Adrienne B. Haynes and I’m an entrepreneur and attorney based here in Kansas City. My law firm, SEED Law, has been partnering with business owners across the Northeast and the city for almost 11 years. I loved living in the Northeast and I was fortunate to serve as an Entrepreneur in Residence for the Kauffman Foundation in 2017. Together with a dedicated group of Northeast residents and leaders, we explored a community designed innovation district pilot program. I was able to present this work during a TEDxUMKC Talk on Community Innovation Design in 2020.

Over the next few weeks, I’ll be contributing articles and resources on small business and estate planning legal considerations. If you have questions, please reach out directly at adrienne@seed.legal.