Business Planning IS Estate Planning: Crafting Your Operating Agreement

Recently, I spoke with a local group about estate and financial planning. They came from various backgrounds and all had different financial circumstances, but a surprising number of the attendees were business owners. They ranged from those with stakes in investment real estate LLCs to sole owners of cash-flowing businesses. While they originally came only to hear about wills and trusts, through our lively discussion they quickly realized that business planning, through an operating agreement, is just as crucial as drafting a personal will.

The operating agreement is the core legal document for any Limited Liability Company (LLC). It is the perfect place to plan for the future of your business. Your LLC is the place where you can ensure that this asset of significant value – that you’ve nurtured and grown with your blood, sweat and tears – will be passed along according to your wishes. 

Why Your Business Needs a “Will”

For most entrepreneurs, their business is their single most valuable asset. When you create a personal estate plan, you draft a will or trust to govern what happens to your house and bank accounts. Without these documents, your assets fall under your state’s generic default rules (probate), which leads to delays, expense, and family conflict.

The exact same principle applies to your business. The operating agreement serves as the business’s legal blueprint – its will, trust, and prenuptial agreement, all rolled into one.

Without this document, your LLC or business partnership is governed by generic state statutes. These “one-size-fits-all” rules rarely align with the unique needs of your business or your intentions, leading to chaos and disagreement when an owner transition inevitably occurs.

Planning for Contingencies: The Operating Agreement as a Shield

Estate planning prepares for major life events you hope won’t happen. The operating agreement does the same for your business, acting as a powerful shield against four common scenarios:

1. Defining Ownership & Transfer

In personal planning, you name your heirs. In business planning, the operating agreement clearly defines ownership stakes, capital contributions, and financial rights.

• The Issue: If a partner unexpectedly passes away or becomes disabled, their ownership share could fall into the hands of an inexperienced spouse or relative. This forces the remaining owners into a difficult, unintended co-ownership situation.
• The Solution: A well-written operating agreement dictates how that interest is valued and transferred. It can even mandate a buyout of the ownership share, which is often planned for and funded with life insurance.

2. Decision-Making & Dispute Resolution

A trust appoints a trustee and outlines rules for asset management. Your operating agreement does this for your company’s management.

A well-crafted operating agreement dictates voting rights, clarifies who has the authority to sign contracts, and establishes the formal process for major decisions (like selling the business). Crucially, it sets forth a mandatory dispute resolution process (like mediation or arbitration), which keeps partner disagreements out of public, costly court battles.

3. Protecting Your Personal Assets

The main benefit of an LLC is to create a “limited liability” shield between the owners’ personal assets and the business’s debts.

This shield is most secure when supported by a formal operating agreement. Failing to draft one, or failing to follow its rules, is one of the quickest ways a court can “pierce the corporate veil“ and expose owners to business liabilities. The Operating Agreement helps maintain that crucial legal firewall.

4. The Exit Strategy (The Buy/Sell Clause)

A will often contains instructions for selling or distributing assets. The operating agreement’s most critical part is often the buy/sell or transfer testrictions clause.

This clause is the contractually agreed-upon method for a partner to exit the business – whether by choice, retirement, disability, or death. It establishes a clear formula or process for valuing the company and provides a mechanism (like a mandatory buyout) to ensure the remaining partners can maintain control and continuity.

Minimizing Uncertainty

You create an estate plan to protect your family’s financial security. Your business deserves the exact same level of foresight.

By drafting or reviewing a comprehensive operating agreement, you replace unpredictable state default laws and inevitable human emotion with clear, binding, contractual rules. This proactive step removes the uncertainty that can destroy years of hard work.

At Franklin & Frankel, we work with many businesses as they develop operating agreements to protect their business and personal assets. Reach out today to set up a time to discuss your plan and protect your business assets.