If you have been following the blog you have likely seen our business entities series or perhaps even my and Paul’s publication on business organizations. After forming a business entity with your farm operation, you may want to consider developing an operating agreement, if there is more than one member in that organization. For example, if Ma and Pa and Son and Daughter are all owners of the farm limited liability company (LLC), an operating agreement would help protect all ownership interests and lay out details not addressed in the paperwork filled out for the state. Today’s post will briefly go over what an LLC operating agreement is and why it may be something to consider for your own agriculture operation.
What Is An Operating Agreement and What Does It Do?
When you form a limited liability company in Maryland, you are not required to have an operating agreement. Such agreements are highly advisable, however, and many other states actually require that LLCs have them. With that said, let’s get to the real beef of our discussion today. An operating agreement is an agreement among all members of the LLC governing the financial, managerial, and dissolution rights and duties of each member. The main purpose of this document is to structure the internal operations of the business in a way that suits the specific needs of the business owners. Once the document is signed by all LLC members, it acts as an official contract binding them to its terms.
For example, if Susie and Paul, brother and sister, both own the farm under an LLC but Susie lives in downtown Chicago and works as a nurse while Paul lives on the farm in Oklahoma, their operating agreement may state that Paul makes all business decisions while Susie has no decision-making power. Another important part of the operating agreement is the ability to avoid state default rules governing LLCs when they do not have an official operating agreement or for the purpose of farm transitions. For example, operating agreements can help transfer interest in the event of a member choosing to leave or in the event of a death. The operating agreement may state who, how, and why a buyout or buy-sell options are necessary or required. This can save a lot of pain and heartache when unfortunate situations occur under a farm LLC.
Other items which may be included in an operating agreement are, but are not limited to:
· Percentage of members’ ownership
· Voting rights and responsibilities
· Powers and duties of members and managers
· Distribution of profits and losses
· Statement of when and how to hold meetings
· Dissolution options
Today’s post is not to be considered legal advice but simply a piece of education to use in the forming of your business organization. If you have further questions about business entities or operating agreements, feel free to email me at mailto:aellix@umd.edu