Agreements Slideshare
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The document discusses key considerations for developing an effective operating agreement or member agreement for a corporation or LLC. It outlines various questions that should be addressed, such as who can call meetings, voting requirements, officer roles and authority levels, procedures for exiting the business or transferring ownership to a new member. Having a thorough agreement that plans for different scenarios can help avoid disputes and keep the business functioning smoothly.
Agreements Slideshare
- 1. Incorporate and Be Free Negotiating your Operating or Member Agreement
- 2. By continuing through the remainder of this primer on incorporation within the United States of America ( ) it is understood by you that this material is a starting point. If you elect to incorporate yourself please check with the relevant state’s Secretary of State department for additional information. Accordingly, it is also agreed that the responsibilities associated with incorporating lie solely on the business owner’s shoulders and therefore it is in the reader’s interest to research this topic fully before proceeding.
- 3. The Goal of this presentation is to offer some information relative to developing an effective Operating Agreement (in the case of a corporation) or a Member Agreement (in the case of an LLC these agreements may be called Operating or Member Agreements) the aLpha3 team would like to thank you for your time and wish you success in all of your endeavors! Thank you!
- 4. How a corporation functions : Shareholders Elect Board of Directors Board of Directors : Appoints Executive Managers (CEO, CFO, COO etc..) Managers: Manage the Day to day Operations The overall checks and balances within a Corporation:
- 5. How a corporation functions : The Operating Agreement fills in the specifics between these relationships. Who can call a board meeting? How much advance notice is required? How many Directors need to be present to adopt a resolution? How many Board Members need to be present to appoint / remove an officer (CEO, COO, CFO etc.)? What are the levels of empowerment for each officer? Are there spending limits (perhaps 2 officer signatures are required for expenditures over a certain level) ..
- 6. How a corporation functions : Who can call a board meeting? - Typically a corporation holds at least one meeting per year and it is required that this meeting is documented (Minutes are taken). However, what happens if there is an emergency? Who can assemble the board to take definitive action? This can be stipulated and negotiated and should be considered carefully. How much advance notice is required? - This element would allow all parties involved to prepare and make arrangements to attend. If you wanted to be involved in the vote for a new resolution how much time would you need to ensure that the notification arrived in such a way to allow you to prepare and to ensure that you would attend?
- 7. How a corporation functions : How many Directors need to be present to adopt a resolution? - This point also relates to levels of empowerment. How many directors need to show up to validate the meeting? For instance, if there are 11 Directors on the Board, but only 3 show up for a vote, should that be sufficient to vote in a new policy? This element can profoundly effect the operation of the company. On one hand, requiring the participation of fewer Directors increases the agility of the Board, on the other hand, it makes the situation more volatile and allows a more active (possible) minority the ability to shift direction without broad support.
- 8. How a corporation functions : What are the roles and levels of empowerment for each officer? - At first this may seem somewhat obvious. Isn’t a Chief Executive Officer (CEO) the top dog? Actually, in some cases the Chief Operating Officer (COO) calls the shots. What about the Chief Information Officer (CIO) vs. Chief Technology Officer (CTO)? These nominalizations need to be clearly understood in terms of functional responsibility and financial oversight in order to bring focus, accountability and operational transparency to the enterprise.
- 9. the LLC, greater flexibility means more choices and discipline! Since a Limited Liability Company is a hybrid conceived to offer the benefits of a Corporation within the context of a Limited Partnership, the end result creates an extremely flexible situation. Flexibility is a sword that cuts both ways. Certainly a greater range of abilities exists which may be advantageous. However, each operating point must be considered carefully and agreed amongst the membership (shareholders within an LLC are called “Members” and their ownership is reflected as percentages rather than receiving issued stock shares).
- 10. the LLC, points to consider: Exit Items / Selling your interest or being bought out The following questions should be asked and agreed between the Members: Does the company have the right to “Call” a Members Interest? Conversely Does the Member have the right to “Put” the purchase of his interest so that the company is forced to buy it? What happens if the company calls me out (buys my interest) and then turns around sells it for a much higher price? What percentage of the company would need to vote to “Call” my interest (consider this could be used to force a member out of the company)?
- 11. the LLC, points to consider: Exit Items / Selling your interest or being bought out (continued) The following questions should be asked and agreed between the Members: If a member has the right to “put” it to the company and force the LLC to purchase their share either in whole or in part – how should the pay out be structured? Consider that this could kill the companies working capital! In the case of a Member buy out, could some portion of payment owed by the company to the former Member, be converted to a Loan? Interest rate? Termed out over what period?
- 12. the LLC, points to consider: Exit Items / Selling your interest or being bought out (continued) The following questions should be asked and agreed between the Members: If a Member is bought out, are they still able or are they required to continue to work for the company for a period of time? Is a Member able to sell his percentage to an outside interest? This could effect control of the company. Questions related to this point should include: Can the LLC counter offer an outsiders buy-out How long should the LLC have to approve the purchase of a Member’s interest or tender a counter offer?
- 13. the LLC, points to consider: Other Shift in Ownership items The following questions should be asked and agreed between the Members: In the event of a tragedy, does the Member’s interest get passed to the next of kin? Does that interest still retain voting rights as well as economic rights (more on this later but within an LLC, economic share doesn’t need to be proportionate to the voting share). Does the company have the right to buy out the Member’s share and under what terms should the Member become incarcerated / pas away / become incapacitated and therefore unable to perform their duties etc..
- 14. the LLC, points to consider: Other Shift in Ownership items The following questions should be asked and agreed between the Members: As the LLC is an “Asset” owned by the Member, should the member be able to use the percentage ownership as collateral for a loan? This can be a slippery slope depending on how the prior points were resolved. Consider the following scenario: Member defaults on a loan; Lender takes control of Member’s share; Lender resells share to an outside entity and the company is not able to financially counter the offer; control passes away from the remaining Members and is taken over by the outside purchaser? Situations like this should be considered from all angles, and impact every question asked this far.
- 15. the LLC, points to consider: Management and Policy Making The following questions should be asked and agreed between the Members: Each Members role should be defined along with Sweat Equity exchanges (as an example: if member X completes the following tasks they will be awarded Y Percentage etc.) What percentage of ownership is required for changes in policies? Changes in the Member Agreement? Major Decisions? Spending Limits? etc.. How much advance notice is required to hold a Member Meeting (LLC equivalent of a Board Meeting). Who can cause a Member Meeting to be assembled?
- 16. the LLC, points to consider: Arbitration / all other reasons for exit The following questions should be asked and agreed between the Members: Litigation and disputes over the exit when a Member desires to leave or is asked to leave are painful expensive and can destroy a successful business as all management focus turns away from the enterprise. We strongly urge all owner’s to list every imaginable and unimaginable contingency (even fraud, incarceration, death, mismanagement etc.) and agree on the manner in which it will be handled – INCLUDING the method and calculation behind the LLC’s valuation (how much a given percentage is worth in dollars). Put another way, if these items cannot be discussed or agreed upon upfront, how will they be settled when everyone involved may not even be on speaking terms.
- 17. CONGRATULATIONS! From our first presentation on this topic, you have your official Articles, EIN, have filed your Statement of Information, have been assigned your State Employer ID and as needed have been assigned your Re-seller’s ID number. Perhaps you have elected to file a Sub chapter “s” election. Now you have a well thought out Operating / Member Agreement that covers you in the case of all contingencies. Next – Set up your books so that compliance activity is easy and you can guide your business through Transparency – all in one! Coming next week! Now to the task at hand making money! We at aLpha3 wish you success in your ventures and only the brightest of futures! Incorporate and Be Free