What is an operating agreement for a real estate investor

Chapter 4: Step 3:

Set up your operating agreement

Time: 4 hours, Day 2.

 

What is an operating agreement for a real estate investor?

An operating agreement is simply that rules that you set up for your investment company.  They are your rules and you get to make them.  There is a lot of power in that, so read more about how to set up a good one.

The goal of this step is to make it so that when you have disagreements later, you know how to resolve them.  If you are really lucky and good here, then you may even avoid many of the common problems that can kill a good company/partnership.  More often than not, it’s problems that can be avoided from the beginning that causes a company to fail and even save you from unnecessary liability.

If you want to see a great example of an operating agreement for an LLC sign up for the newsletter and you will get a link it.

Disclaimer: In my newsletter I give a great example of an operating agreement that you can build yours off of.  But in some states it will not give you the protection that you may expect it to.  Also, I don’t use the version that I provided here. The reason being is that mine is really the creative invention of my attorney and tailored to my needs.  Most of those who partner with me would use that agreement as a base and we would customise it to meet our needs, although some relationships are more complex and need an artist (a really good attorney) to work out some of the finer details.

The big questions that come up and need to be addressed before you start is:

  • How to buy someone out.

  • What is the purpose of the entity

  • Who is responsible for what

    • What is the consequences of not performing

    • What time lines are needed

  • Who has voting rights, and who has management authority.

  • At what point does a manager need to get authorization from the other partners and how many people have to agree on something.  What to do when someone doesn’t agree on something.

  • What to do if a member is sued, gets divorced, dies, becomes disabled…

  • How to retire.

  • Can members sell their ownership, do they have to give other members the right of first refusal.

  • Are members responsible for bringing more money to the partnership if it’s needed, if so, how soon, and what if they chose not to (or are unable to).

  • And much more. Brainstorm all the possible problems and get them out of the way before you spend any time or resources on a partnership or agreement.

 

The following are some parts that you should have in your operating agreement.

 

  • Continuation: Effectiveness, when and where  the LLC is born.

  • Name: what you call the LLC.

  • Term: when (if ever) will the llc will die.

  • Statutory Agent: who will be the statutory agent for your company and where they are located.

  • Purpose: The business purpose of the entity.

  • Powers: What the company is or isn’t able to do.

  • Member’s Percentage interest: who owns how much.

  • How Adjustments in percentage interests will be made

  • Initial capital contributions and assumed liabilities: who has to contribute what, and who is required to take on what liabilities (ie loans for credit partners).

  • Account Maintenance: How the capital accounts and others will be maintained.

  • Distributions: How the company will pay it’s owners.

  • Tax Matters: How will taxes, and accounting be handled and by who?

  • Books and records: Who will maintain the books, how and how will they report and how often.

  • Management: how will the company be managed, will there be a board of managers and if so who are they?

  • Compensation: how will members be paid for services.

  • Voting: who and how will people vote? What will constitute a majority vote. What choices can be resolved with a 51% vote and what needs a majority vote.

  • Business plan: What is it, and who will prepare it.

  • Transfer or sale of membership interest: how can someone sell or transfer their interests.  Do the existing partners have the right to first refusal and if so what are the conditions for that. What happens if there is an unpermitted transfer?

  • Liability: under what conditions are members liable for business activities.

  • Insurance: what are the insurances that are able to be purchased and maintained and the conditions around that.

  • Dispute Resolution: how are disputes to be resolved

  • Dissolution and Termination: how and when can the company be dissolved (closed)

  • Miscellaneous: anything else that we missed, contact information…

Either buy one or modify the one you got from the newsletter at www.makeRealEstateInvestingSimple.com (has lots of forms and documents to help get you up fast).  Use them as a base, but make them your own or use one from a service that helps you setup your entity.

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