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Is An Operating Agreement Appropriate for Your Farm?

Is An Operating Agreement Appropriate for Your Farm?

November 30, 2016

Once a business owner, specifically an owner of a farming business, decides to team up with Dunncreek Advisors and create a legacy transition plan, it’s important that they determine if added legal protections, like an operating agreement, is appropriate for them. At Dunncreek Advisors, we want to help you make the best decisions for your legacy, and so, we provide you with all of the knowledge and useful tools so that you can determine what works best.

What is a Legacy Transition Plan?

When the unexpected happens, financial and emotional stress can weigh both a family and a business down. Legacy plans are a way to prevent that kind of chaos for your family. It is a financial preparation process that helps define your wants and needs for your business after you are no longer able to run it.

What is an Operating Agreement?

An operating agreement helps to structure the businesses’ financial and functional decisions. Basically, who is doing what within the internal operations of the business. Having an operating agreement within a legacy transition plan helps to protect their limited liability status. This, of course, by categorizing your farming business as a Limited Liability Company, LLC. By giving yourself protection, it prevents your business from looking like a sole proprietorship that would otherwise jeopardize your personal liability. Additionally, businesses need a LLC to clarify the terms for them. If you have agreements made that are only spoken about, misunderstanding and misconstruing can happen. The operational condition of your business should be put into writing with an operating agreement as a way to refer to the agreements when a conflict should arise. Lastly, if an official operating agreement is not in place, the state default rules will govern your LLC. These rules are general blankets that have no personal detail to your business and therefore, are not a wise decision. If choosing an operating agreement, the following will be included:

  • Percentage of members’ ownership.
  • Voting rights and responsibilities.
  • Powers and duties of members and managers.
  • Distribution of profits and losses.
  • Holding meetings.
  • Buyout and buy-sell rules (procedures for transferring interest when members chose or in the event of a death).

At Dunncreek Advisors, we can help walk you through operating agreements. We will show you the documents that span from 5 to 20 pages long. We can also provide examples and sample documents for you as needed. We want you to have all of the information possible to make one of the most important decisions of your life.
If this article has you starting to think about your situation, get in touch with my office at  rdunn@dunncreekadvisors.com. I always like meeting with people who have started this process. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.