An operating agreement is an important document for any business. In particular, it is important if your company is going through a merger or acquisition. Such documents can help to clarify which employees and who will run what departments within the business. The document should detail which roles an employee has. It may also prevent conflicts of interest between two or more employees and it can provide a checklist of tasks that must be carried out by each member of staff.
However, what is an operating agreement? The term ‘operating agreement’ is commonly used in the United Kingdom and often refers to a Memorandum and Conditions of Association. This is essentially a lease of the business from you and a document outlining all the key aspects of the business, including who does what, when, and how. Unlike a hire-out document, which details the conditions of the hire-out, an operating agreement covers all the aspects of what happens within the business. This means that if the business goes bust, for example, there is no need to supply exit details to all employees.
So how important is an operating agreement? Well, it must be properly drafted so that all parties involved are adequately covered. This is very different to a hire-out document, which only covers the hiring and not the termination of contracts. A poorly written operating agreement could see you, your staff and your investors in limbo for months, if not years as disputes brew over what exactly the business means and what duties each person has.
Before drafting your operating agreement, have a plan in place. Decide what roles each team member will have and how those roles will affect others. Will there be any authority figure involved? If so, define that figure and ensure that any decisions made are adhered to. Any deviation should be recorded in writing.
Next, you need to make sure that any changes are noted and that they are communicated to all team members and stakeholders. For example, new hires may need to be informed about the job description and expectations. The inclusion of this information should go through the operations manual. In some cases, it may be best to email or print out the operating agreement for future reference. If changes are not made in the operating agreement, they will be difficult to change in the employment contract when those changes are required by law. For example, if a new employee is added, the existing staff need to be notified about this change.
One of the main reasons why companies use operating agreements is to protect themselves from claims at a later date. If one of the team members feels they were unfairly selected for a role and that there was some wrong doing, they can bring legal proceedings against the business. Such claims often lead to hefty fines, staff dismissals or in some extreme cases, termination of the entire business.
However, the purpose of operating agreements is not to prevent employees or business owners from taking legal action. Far from it, operating agreements are designed to make sure the highest standard of performance is maintained throughout the company. It is absolutely acceptable for there to be some miscommunication or misunderstandings throughout the company, as long as those mistakes are quickly resolved and no action is taken to remedy the situation. If the issues are left uncontested, the courts are likely to award compensation in an amount that is fair and equitable to both parties.
The cost of operating an organization can be expensive. That is why an operating agreement is so important. While you may initially spend time and money on writing the document, the cost of maintaining it in the future is less than if the document is never implemented. Therefore, the operating agreement can actually save your business money in the long term. A solid operating agreement can help ensure that you avoid costly mistakes and costly lawsuits down the line.