Spring is a time of renewal for many. It is a time to refresh and adjust in preparation for a new season. It’s also a great time to look at your practice’s operating agreement or consider drafting an agreement if you don’t already have one.
Operating agreements are the road map for how your business will be managed and how your entity will be governed. They can cover tax issues such as how distributions are made, who your tax representative will be, and whether basis step-ups will be allowed. Operating agreements can also cover how buy-ins and buy-outs will be structured, who has decision-making authority for the entity, and whether there will be regular meetings of the ownership group to discuss issues affecting the business. Further, since the agreement is adopted by all owners, it is also pivotal if a disagreement ever arises among them.
As businesses change and develop over time, operating agreements should be reviewed to ensure that they still accurately reflect the owners’ wishes for the organization. If it doesn’t, engage your legal counsel to help amend your operating agreement. Keeping your operating agreement current helps ensure that what is happening in the organization is consistent with the document that governs it. Since changes can happen slowly over time, it might not be obvious that the organization has strayed from the agreement. Unfortunately, this can be when disagreements creep in and when having an up-to-date agreement is crucial.
If your organization doesn’t have an agreement in place at all, it’s encouraged to start the process of drafting one. Those who don’t have one in place may feel it isn’t necessary because all the owners are in agreement; however, obtaining an operating agreement is a small undertaking to ensure that, should any periods of disagreement occur, they can be easily resolved.
To summarize, having an operating agreement is essential to the life of your organization as it offers clarity and structure for how your organization is run and provides legal protection for its members. It can also be amended as the needs of the entity and owners change to ensure operations run smoothly in an ever-changing world. Contact your trusted advisors to see if you need to change your existing operating agreement or if instituting an operating agreement is right for your business.
Author: Kristina Odermann, CPA, MST | [email protected]
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For more information on this topic, please contact a member of Withum’s Healthcare Services Team.
