If you`re starting a business and considering forming an s corporation, it`s important to have an operating agreement in place. An s corp operating agreement is a legal document that outlines how the company will be operated and managed.

What is an s corp?

An s corporation, or s corp, is a type of business structure that allows for pass-through taxation. This means that the company`s profits and losses are passed through to the owners` personal tax returns. S corps also provide liability protection for owners.

Why do you need an operating agreement?

While an operating agreement is not required by law for s corps, it`s highly recommended. This document helps to establish guidelines and procedures for how the company will be run, such as how decisions will be made and how profits will be distributed.

Without an operating agreement, the company may be subject to default state laws, which may not align with the owners` intentions. Additionally, having an operating agreement in place can help to prevent disputes between owners and clarify expectations.

What should be included in an operating agreement?

An s corp operating agreement should cover the following key areas:

1. Ownership structure: This section should outline who the owners of the company are and what percentage of the company they own.

2. Management and decision-making: The agreement should detail how decisions will be made and who has the authority to make them. This can include who will manage day-to-day operations and who has the authority to hire or fire employees.

3. Capital contributions and distributions: The agreement should specify how much money each owner has contributed to the company and how profits and losses will be distributed.

4. Transfer of ownership: This section should outline how ownership interests can be transferred, whether through sale or inheritance.

5. Dissolution: The agreement should include a plan for how the company will be dissolved if necessary, including how assets will be distributed.

Overall, an s corp operating agreement is a crucial document for any business owner considering this type of structure. By outlining key business procedures and expectations, this document can help prevent disputes and ensure the smooth operation of the company.