Background Information

• In the codes and laws of each state and country are default rules of how corporations, partnerships and LLCs are to be governed and administered. While the laws set out some basic rules and procedures, there are many details and circumstances that are situation-specific and must be addressed in an operating agreement to the desires and wishes of the owners. Without an operating agreement in place to govern a small business, it is very likely that discord between the owners will arise.
  
  

Ownership Structure

• The first item that a shareholder's agreement should address is the ownership and management structure of the business. All operating agreements should outline how many shareholders there are and what percentage of the business each owns. The document should also address nominations for the board of directors, the officers of the company and the roles and responsibilities of each owner.
  
  

Buy-Sell Provisions

• Sometimes shareholder's agreements are referred to as buy-sell or buyout agreements, as shareholder's agreements often contain buy-sell provisions. Buy-sell provisions outline circumstances under which owners may sell or are required to sell their shares. If one owner dies or becomes disabled, there is often a function in the agreement that allows the other owner to buy out the surviving spouse. Other provisions that should be addressed include retirement or simply a desire to exit the business. Insurance should be used to fund the death and disability provisions of a buy-sell agreement at all times. The buy-sell provisions in an operating agreement should also always include a valuation formula to value the company.
  
  

Salary and Profit Distribtutions

• Sometimes salary and employment agreements are documented outside of operating agreements, but they can be addressed in the agreement as well. Beyond base salaries, there should always be a documented procedure for paying out profit distributions and any associated taxes.
  
  

Covenants Not to Compete

• A common clause in shareholder's agreements is a covenant not to compete. If one owner decides to exit the business, he should not be allowed to form a competing business. A covenant not to compete can outline the time frame and geographical areas under which a departing owner may or may not engage in a similar business.
  
  

Limited Liability

• Operating agreements should always contain an indemnification clause and clearly outline the limited liability status of each shareholder or LLC member.