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How Understanding State Legal Requirements Ensures Business Success

Earlier this year, the National Retail Federation (NFR) issued its annual retail forecast and published its results for retail sales in 2020. Retail sales in 2020 almost doubled from those forecasted, reaching 6.7%. Moreover, retail trade added $4.8 billion to the GDP in 2020, according to figures published by the US Bureau of Economic Analysis.

The NFR prediction for retail sales in 2021 is that growth of between 6.5 and 8.2% is expected once again. These encouraging figures give startup entrepreneurs much-needed confidence as they take the initial steps to form their businesses. However, ensuring business success requires a good understanding of their state legal requirements.

Meeting State Legal Requirements

Every new business needs to meet specific state legal requirements. According to TRUiC (The Useful Information Company), some of the most apparent legal requirements are choosing the proper business structure to protect the owner’s assets, the business name registration requirements, and issuing a tax identification number.

One of the legal requirements that cannot be ignored, TRUiC warns, regardless of the business structure, is the operating agreement. When forming a business, this document is mandatory in some states, but it is essential even in states where it is not required. See the video here to see its benefits.

Understanding The Importance of the Operating Agreement

Whether an LLC or a corporation, every business needs a legal document that outlines the financial and working relations between the owners (members) and managers. This document is called the operating agreement. These agreements vary according to the type of LLC and the state they are drawn up for. Still, they establish ownership, outline the business governing rules, and state the duties and responsibilities of the members. 

Creation of the company and its management

In the first and second sections, the operating agreement covers the company’s creation, management, and voting. Here, the state the business is formed in, date of formation, and forming members are mentioned. The ownership interest of each member is also noted.

In this part of the business operating agreement, members allocate votes and define the number of votes needed for specific actions. Finally, they decide on how the LLC is to be managed (member-managed or manager-managed).

Money matters, and membership changes

The following four stages of the operating agreement cover the starting capital given to the business and determine how any additional money will be raised. Finally, the following distribution of profits and losses is defined in clear terms. Instead of money, other forms of payment are often described in operating agreements, including business assets or physical property.

Membership changes are not uncommon, but these often lead to problems if they haven’t been defined in the operating agreement. The process of adding or removing members is essential and must be described.

What are the circumstances that will lead to the dissolution of a company? Conversely, when may a company not be dissolved? These circumstances should also be laid out in this important legal document.

Making changes

Each business may have other essential topics it needs to add to the operating agreement, and these can also be included. Often, when the circumstances of a business change, an operating agreement can be updated with the consent of all members.

Operating agreement tools

Many businesses choose to draft their operating agreement with an attorney, but it is a document that doesn’t need to cost a company anything. Several online tools make it easy to download a template or a customizable free operating agreement perfect for single and multi-member LLCs.

Failure to have an operating agreement

Since this legal document is not a requirement in most states, many businesses fail to see its importance. In the absence of an operating agreement, a court may decide the corporate veil does not protect an LLC. The agreement also helps with disputes about member payments. Finally, every state has default laws that every business is forced to adhere to without the absence of an operating agreement.

Conclusion

Business success hinges largely on the efficient running of the enterprise. Nevertheless, an operating agreement is a tool by which a business can ensure it continues to remain strong, even when troubles arise between members, or if the company faces a lawsuit. It does this by strengthening the corporate veil, giving the business credibility, and preventing misunderstandings.