The Internal Operating Agreement

Your internal operating agreement is the rule book for your company. A corporation has a shareholders’ agreement and by-laws. A limited liability company (LLC) has an operating agreement. A partnership has a partnership agreement. It is a contract amongst the owners of the company and between the owners and the company. In almost all cases, an internal operating agreement is required by state law. Even if you are a single member LLC or sole shareholder of your corporation, your company must have an agreement between you and your business. Consider the importance of the internal operating agreement…

  • Failure to draft an internal operating agreement may invalidate your entity status, stripping you of your protection against personal liability.
  • If you are a band, dance troupe, group of filmmakers, or other creative venture, what happens when someone leaves the company? Do they have rights to use the name of the company in a new venture? Do you have to buy them out immediately (potentially causing your business to become insolvent)? Does your company automatically dissolve?
  • If your internal operating agreement is not thorough, default laws drafted by politicians will control the operation of your company. Under default laws, your company may have to hold certain meetings at certain times at certain places – your ability to govern become extremely limited. A solid agreement will outline issues of shareholder/member meetings, as well as numerous other details of corporate governance to ensure pre-existing laws do not cause unintended consequences.
  • Who owns your company? Are profits and losses split evenly, or does one party own a majority share in the company (and thus, the profits and losses too)? Do investors receive a disproportionate share of profits to recoup their investments before a different split takes effect?
  • What are the management rights of each owner? If you have a few investors and some owners also serving as managers, do all the parties have equal voting rights? Management rights?
  • Customization. The rules governing your company should be specific to your needs. We work closely with you to create a company structure that is personalized for your business and management style. There are plenty of automated services that offer “customized” internal operating agreements… but understand, such an agreement when sold to thousands of businesses cannot be truly customized – it is usually a fill-in-the-blank form that many times causes more confusion than clarity.

Contact us today to discuss your business needs and the drafting of an internal operating agreement for your company.