Your operating agreement: Plotting out your business relationship

When it comes to starting a business entity there is a lot to decide and like any relationship the more people the more problems that come up in the birth of your business. Regardless of the type of entity you decide to form it is critical to start an open dialogue when it comes to deciding how the important business matters of your business will be handled.  Businesses ebb and flow so while every important matter may not be a priority for your operating agreement there are a couple that are key.

Money – Like it or not money will be a running theme in your business so deciding how it should be handled is crucial.  As you start off contributions take center stage.  While the state default is that your ownership rights are determined by your percentage of contribution you can decide to split it in different ways to reflect experience, sweat equity or other resources being donated by a partner.  It is also important to decide once money or losses begins to flow how it will be divided.  Again it can just be a reflection of initial contributions but it can also work to compensate members for management or even repay initial heavy contributions.

 

Management – Just because you start a business does not mean your main skill set will be to run the business.  In a partnership hopefully each partner will bring their own wining expertise to make your team as well rounded as possible.  So if one person is the money and one is the brains you want this discussed and to be reflected in your operating agreement. You can also decide that appointed managers will be responsible for managing the entity all together.  The decision you make early on can have important repercussions especially if changes is needed so discussing it early helps sort out problems before they start.

 

Changes down the road – If nothing else is guaranteed in business change definitely is.  How your business will roll with the punches called entrepreneurship is key to long term success.  Thinking about what happens if a partner gets sick, dies, or no longer wants to retain their shares in the business give everyone a leg up instead of having to fight in the case of disaster or discord.  Note that the default to some agreements is if that if one member rescinds the entity will cease to exist to read and proceed carefully when planning for the future.

LLC vs. Corporations: How to start your business off on the best footing

Going into business for yourself can be a terrifying maze of decisions without much clarity on the impact these decisions will make further down the line. One of the earliest decisions people often make as they begin the journey is how to set their business up.  So with your $300 filing fee (in the State of Texas) and a little bit of time forming a completely separate entity for your business can easily be within your grasp.  With LLC’s and Corporations being some of the most common entity types making the decision between the two can assist in setting your business and the business owner up on the path to success so let’s talk about the positives, similarities and differences to the different entities.

The positives

The win for both forms is limited liability from your business liabilities to your personal accounts. This means that business related to the entity must first look to the entity for relieve.  Owning a business comes with its own risks and it gives business owners a lot of relief that their personal assets have protections from the things that transpire in their business.  Beware though that this separation holds up in court as long as you respect it in practice meaning keep accounting up and co-mingling down in your business

LLCs

The biggest selling point for LLCs as an entity choice is normally flexibility. From tax filings to management to reporting many of the decisions remain your choice as your company grows.  As a member of a LLC you have the choice to carry over your profits or losses directly to your personal tax returns or opt to file taxes for the company separately.  Additionally you can choice of members within the LLC will have the right to manage the company or if managers can be separately appointed.  With more relaxed requirements for meetings and recording this is often a good fit for those still working through the processes their business will utilize.

Corporations

While corporations may be more rigid, their formality can be a perfect fit for pulling together investors and managers in a more arm’s length transactions. With corporations taxes have to be filed for the entity as annual reports and recorded minutes.  On the plus side however raising income for a corporation can be very straightforward as shares can be easily sold and resold without jeopardizing other operating restrict for the company.