Brewery Law 101: Operating Agreements
Once you’ve chosen the right entity for your brewery or distillery, you’ll need to draft some key contracts governing your business entity. Today, we will continue our Brewery Law 101 series by discussing operating agreements. As we discussed in our post on brewery entities, an LLC likely is the right choice of entity for your brewery or distillery. So we will focus on operating agreements, as operating agreements are the primary governing document for an LLC. (While we are specifically discussing operating agreements, many of these issues will carry over to the governing documents you will want for any entity type.)
One of the most appealing attributes of the limited liability company and why it has been so widely adopted is the flexibility it affords the owners with respect to management. LLC operating agreements are for an LLC what bylaws are to a corporation. The operating agreement can be thought of as providing the “laws” of the business, laying out how the company will be managed. The operating agreement provides the rights and obligations of the members, including members’ management abilities and economic interests. Without an operating agreement, limited liability companies are governed by the default provisions (in Washington, they are provided in Chapter 25.15 of the Revised Code of Washington).
At the outset, members of an LLC will need to decide between the two primary choices of management structures. There are two basic LLC management structures: (1) LLC members may select representative management (manager managed); or (2) LLC members may directly manage the company (member managed). Under Washington law, the default management structure is member managed. If LLC members elect to be manager managed rather than member managed, the LLC’s certificate of formation must state so explicitly. If the LLC is manager managed, the operating agreement should include details about how the managers are to be selected, the length of a manager’s term, and under what circumstances managers can be removed.
Within the two primary structures, the management structure can be arranged in any number of ways. But it is most common to break down the management provisions of an operating agreement into two categories (what and how): (1) provisions affecting what actions managers can take, and (2) provisions affecting how managers make decisions.
Members should use provisions falling into the first category to define the scope of a manager’s authority to conduct the brewery’s business. Here, members may elect to restrict management from signing significant contracts on behalf of the LLC or selling substantial company assets.
Having established what actions a manager can or cannot take, the operating agreement should further provide how managerial decisions are to be made. For example, the operating agreement may provide that managers can unilaterally take actions that are within the “ordinary course of business” (as defined in the operating agreement), but cannot take “other significant actions” (as be defined in the operating agreement) without a consensus among all managers or members.
Another key consideration of the Operating Agreement is the buy-sell provision. Buy sell provisions detail what will happen when an LLC member decides to leave the company, dies, or is otherwise unable to continue to participate as a member of the LLC. One of the most common buy sell arrangements is the “right of first refusal.” This provision allows a member to sell his interest in the LLC to an outsider as long as the interest is first offered to the existing members of the LLC (and such members decline). Additionally, this section should outline how the business is going to be valued when a member departs. There are a number of different ways to value a business, but the most important part is that the members agree in writing to some sort of formula or decision-making process on how to value the brewery before a dispute arises.
If you are a brewery or distillery owner who needs help drafting an operating agreement or other contracts for your business, call (206) 745-5229 or email firstname.lastname@example.org for a free consultation with one of our experienced brewery attorneys.
Photo l Flickr: Teruhide