This article is written by Ananya Mondal, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.
Operating Agreement is the legal agreement between owners, called members of an LLC which defines how the company will manage its business.
Limited Liability Company (LLC) is one of the types of private company. The members, who are considered as owners or partners in other businesses, handle the said business. The formation of an LLC provides fixed tax benefits and the members are protected from personal liability for the debts, additional operational costs, or shortcomings of the company.
No doubt, the restaurant industry is a fast-moving sphere where things are persistently altering and moving. This is the reason that the owners of restaurant frequently choose to shape their business as an LLC for the adjustability it allows regarding the determination of the roles, responsibilities, and rights of members.
Every state has its own rules with regard to Operating Agreements. For example, in New York, it is required by law that any company structured as an LLC draft and maintain a written Operating Agreement. Notwithstanding of its legal obligation, Operating Agreements are indispensable from a practical point of view.
What is a Restaurant LLC Operating Agreement?
A restaurant LLC operating agreement is the legal agreement between the owners of a limited liability company, especially in the restaurant industry, defining how the company will run its business. Although the members, also referred as the owners of the LLC are straightly engaged in handling the company, the structure of business in consequence gives some tax benefits. Additionally, it also safeguards them from being held liable in person for the operation costs of company, debts, and other developments.
What does a Restaurant LLC Operating Agreement do?
Having the adjustability the LLC structure provides the owners of the restaurant regarding responsibility, determination of role, and rights of members, a plenty of business owners observe it as the most suitable form.
Preferably, an LLC operating agreement foresees the difficulties of future and suggests premeditated solutions. The key function of a restaurant LLC operating agreement is to administer the relationship between the members of the business. An business, which accepts an LLC structure, becomes a naturally flexible organization. It grants the owners to appoint the investors in the company as directly or indirectly in their operations and in addition to it, the owners are allowed to assign responsibilities and name the managers.
A restaurant LLC operating agreement can define how losses and profits are shared by members. Therefore, it is preferable to create an operating agreement for an LLC.
Benefits of a Restaurant LLC Operating Agreement
There are five different benefits of a restaurant LLC operating agreement, such as the following:
Each restaurant has its own unique shape of ownership; ownership and profit interests should be distinctly explained in an Operating Agreement.
Generally, members of an LLC will possess a different percentage of the business, that may or may not associate with the interest of that member interest in company profits. In addition to it, unique roles are played by the members in the company, what may designate them to added compensation or equity.
For instance, an owner may have responsibility for the routine management of the restaurant where another one may be just a passive investor. Operating Agreements make clear such responsibilities and can also read out how members may be expelled from the LLC in case if relationships turn bitter.
2) Intellectual Property:
Furthermore the structure of ownership, the Operating Agreement is also supposed to talk about the ownership of the company’s intellectual property (IP).
The IP of a company is an ideal concept which will vary from company to company, yet it usually refers to things like the name, logo, and ideas of the company (for example: trademarks, copyrights, patents, recipes, operation manuals, etc.). While a restaurant sets us its prestige and acquires name recognition, Intellectual Property can become an important asset of the company. Even in several cases, the Intellectual Property of an organization could be more worthwhile than the physical assets in that organization.
3) Voting Rights:
In the matter of voting on crucial settlements and on taking major steps for business, LLC Operating Agreements usually shapes the rights every member has, in general associating with their role in the business.
For instance, a passive investor probably can not select which vendors the company employs, but he/she may be authorized to veto a company sale.
Generally, larger Limited Liability Companies provide regular control of the company to a member or a certain selected members, whereas smaller Limited Liability Companies may be managed by all the members of the company.
However, there is no appropriate answer to determine how the decisions of the business are to be made. It is suggested to mention it clearly in the Operating Agreement who will have the power to make decisions and when.
4) Distributions and Management Fees For Members:
In an Limited Liability Company, members get a certain fixed percentage of the profits of company, which is also known as a distribution.
Ordinarily, it is a misunderstanding that the percentage ownership of a member must directly correlate to the interest of that member in company profits. For instance, it can be read out by an Operating Agreement that a member, who owns 95% of a Limited Liability Company, may only be entitled to 5% of the profit of LLC.
This adjustability also grants Limited Liability Companies to “reward” the investors by giving them first concern over other members, regarding the profit distributions. Typically, a restaurant is considered as an uncertain investment, so giving investors importance in profit distributions may be helpful and also it may attract them to the project as well.
As equity ownership does not naturally link with profit interest, it is pivotal that investors and entrepreneurs thoroughly evaluate the “distributions” section of the restaurant’s Operating Agreement.
Therefore, a member of the restaurant LLC is suggested to take a management fee additionally to the distributions. Distributions are conditional on specific business results defined in the Operating Agreement, where the management fees depend on the responsibilities of a member’s role.
Most importantly, the detailed information regarding the salary of the members must be inserted in the Limited Liability Company Operating Agreement.
5) Sale of Interests:
One of the most major functions of a restaurant LLC Operating Agreement is defining how equity may be sold to and from members.
Typically, the Operating Agreement of a restaurant should predict worst-case situations, such as the death or incompetence of a member. Having a plan for the future, it will be easy for the members to welcome and simplify unplanned changes of ownership.
Often, small businesses or family-owned businesses discover themselves in a court fight between the stakeholders after the death of principal owner. A well-written Operating Agreement helps restaurants to avoid such situations and allowing for a smooth transfer of ownership in these cases.
In addition to it, Operating Agreements can label deliberate sales of equity. It is not uncommon for the members of Limited Liability Company to want to sell their part or all of their interest at a certain point of time, depending on the lifecycle of the company. The restaurant’s Operating Agreement will decide if members are permitted to sell or transfer their equity freely, or if the members must take consent from other members in order to do the same.
Points to Be Taken into Consideration When Developing an Operating Agreement
In order to create an LLC operating agreement for restaurant, one must consider many issues, including the following:
- Who will have responsibility for the management of routine activities of the company.
- The duties, responsibilities, and obligations of the manager.
- The type of affairs that members leave to the circumspection of the manager and the ones which are particular to a vote of the members.
- Course of actions for expelling a manager who fails to accomplish his obligations.
- The terms of distribution of the company profit and loss to members.
- The plan of actions to comply with when a member wants to leave.
- Procedures for the company in order to raise more money if required.
- A suitable channel through which the company can employ investors as new members if required.
- Whatever happens, if the company is acquired.
- What should happen in an occurrence the business fails.
Application of Operating Agreement in a Single-Member LLC
It is believed by most people that there is no requirement for an operating agreement to structure a Limited Liability Company of a single member, since the key role of the agreement is to explain the terms of ownership among the members. At the same time, it is striking that as a sole business owner, the operating agreement helps to protect the status of the limited liability of business.
If, for example, the single business operates under no operating agreement and accordingly proceeds to court in a dispute, the order may be given by the presiding judge that the owner is not a separate body from his/her single-member LLC business. In that case, he/she will have the liability in person in the dispute, which is known as “piercing the corporate veil.” Essentially, an operating agreement is the most important document one can ever have, as in advance it dictates what happens if one’s single business fails or succeeds.
Limited Liability Companies are popular for their adjustability and the members of LLCs are allowed to direct nearly every point of their management and operations with respect to the written Operating Agreements. Having a thoroughly drafted Operating Agreement grants the owners of Limited Liability Company for cruising forward with confidence, anticipating that future difficulties and questions already have clearly defined answers.
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