When you form a Florida holding company, it is always a smart practice to draft an operating agreement. It is typical for any LLC to have an operating agreement in place to serve as a governing tool, outlining company operations and member responsibilities. In the case of a holding company where the business structure, operations, and management requirements could get complex, you will find it very helpful to have this agreement in place at the onset of your company’s operations. The operating agreement can be used to govern the actions of the owners and protect member interests.
Drafting Your Holding Company Operating Agreement
Nearly every operating agreement has information unique to its company and operations. However, when drafting your operating agreement, be sure to include the following important information:
LLC Members & Profit Allocation:
You will want to list percentages of member interest in the company. Additionally, detail the profit allocation among the members. Profits and losses can be divided among the membership in the manner decided by the owners, which allows for great flexibility in structuring to meet your business or investment needs.
Dividends & Distributions:
Your operating agreement can call for scheduled dividend payouts or any distribution of your choosing. If your holding company has opted for partnership taxation instead of corporate, then your LLC would pay distributions rather than dividends. Distributions tend to be taxed differently and require a K-1 form filed along with your personal taxes.
List Meetings & Restrictions:
List any required meetings that your company holds, whether an annual meeting, quarterly review, internal audit, and more. Additionally, note any restrictions on the managers, such as limiting the scope of work or forbidding certain types of investments. So long as the actions or restrictions are legal, it can be included in the operating agreement.
Plan for Dissolution:
Though you may be more focused on formation at the moment, it is important to put in place a plan for dissolution, as well. The operating agreement should outline specific plans or procedures for dissolution, whether your company is to have a specific life span or must meet certain performance-based targets for profits, financial ratios, and other metrics.
Operating Agreement Considerations
As mentioned before, operating agreements also contain unique information that is specific to your company and the way you operate. Specific information you might include in your own agreement might detail how membership units are handled or guarantee a payment or salary for a certain managing member. Short of illegal activity, there is a wide breath of guidance and restriction that you can outline in your operating agreement.
The operating agreement should also contemplate possible future scenarios. For example, in the event that a managing member wished to sell their stake in the company, you should detail a plan for member departures. Similarly, you might consider establishing a means for conflict resolution should financial disputes or other issues arise between members. Having this process in place before conflict arrives will lend more credence to the process and its results.
Additionally, operating agreements often include a tax distribution clause. If your LLC has opted to be taxed as a partnership, then the IRS views individual members as economic units, which means that members must pay tax on their shares of income even in the event that the LLC does not offer distributions. For this reason, the tax distribution clause would be used to avoid situations in which a manager did not pay distributions and members were suddenly left with large taxes on their economic units. Apart from allowing or restricting actions of membership, the operating agreement can also be used as a tool to protect members.
Expert Operating Agreement Assistance
As you can see from the examples above, operating agreements can cover many aspects of your holding company. For this reason, they can grow very complex and wade into difficult tax and legal considerations that might require professional guidance. It is smart to enlist the services of an attorney that is experienced in holding companies and drafting operating agreements. Even small details in the wording or structuring of your agreement can lead to issues and disputes that drain time, money, and resources. A well-crafted agreement often makes for smooth business operations and little internal strife, which is why the operating agreement is often seen as an important and useful tool for your business.
