An Operating Agreement is the contract of your cannabis company’s life – which it really does not have. However, your company is a legal fiction of a person that has a beginning, called articles of organization for LLCs, and even an end, called a dissolution. The Operating Agreement is a long contract that explains how your company is managed, how new owners come into the business, how existing owners leave the business, and more. Here’s an article all about operating agreements for your cannabis company.
Operating agreements, for any company – not just cannabis businesses – have different sections, or articles. Like chapters in a book, articles in an operating agreement break down the contract into logical subgroups where specific things are discussed. The common sections, or articles, in operating agreements that we use include:
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You may not know it, but your business is just a ball of contracts with all the rights of a person, from owning property, to entering into contracts, and even suing in court, but does not include the right to vote in public elections, but you can spend money on supporting the people running for office. Don’t be so upset, America itself is basically a large corporation – most municipalities are actually corporations. See these useful informational tidbits? – everything you’ve come to expect from…
learn all the differences between corporations and LLCs that may have huge impacts on your business if it raíces money, or just its day-to-day operations.
This is another of our Fundraising. If you are getting into the cannabis industry and you are under a million dollars for your dispensary team, or under 4 million for your craft or micro grower team – then this is the content for you,
You may not know it, but if you are in a LLC for your cannabis company, or on its application, then this is how your company as a legally fictional person literally operates. It is the owners’ manual for your company – which basically means it is like the one for your car – in the glove box and probably not really read too closely.
Because LLCs are flexible – you can have an operating agreement between the owners, called members of the LLC, that literally governs the whole life trajectory of the business. We are going to discuss several different permutations of operating agreements depending on the goals of your business venture.
Remember that LLCs are flexible? What does that mean?
Isn’t that amazing one contract can be set up in almost any number of ways for your unique business situation – so please get your tax guy involved immediately and your corporate consultant and lawyer and discuss it to suit your company’s needs. We can talk about your company’s needs to see what your objectives are – what your exit is – a big check list of things that if you want to get. LLCs are great because not only do they have the flexibility to do whatever your business really needs, they also have relaxed formalities and greater restrictions on transferability of ownership interests.
In an LLC you can set it up so that owners, shareholders in corporate speak, or members in LLC jargon, have no duty to one another. Just be like – I did this – deal with it. That could be a part of the business. We have an operating agreement that we like to call the fugghetaboutit – because not only does it allow you to have the least amount of duties to your partners as a matter of law, but the freedom to leave the business on a moment’s notice, dissolve the business and leave it in the past. It’s the LLC for the deal when you got just one little thing to do.
Then you got the protect yah neck, son – that’s just a single member LLC – The operating agreement basically gives the liability shield and very little else. I have seen these be just a few pages, but you get more people involved and watch the operating agreement grow into the dozens of pages, maybe over 100 depending on the exhibits attached.
Then we have another operating agreement that I like to call the flip – this company is basically on a mission to be sold – the LLC comes with an exit so you are almost for sale from the day you go into business on the terms set by the operating agreement. In this format, we use the tag-along-drag-along clause as a term of the operating agreement to provide protections to the minority owner of the company the “tag along” to be “dragged along” in the full sale of the company, or substantially all of its assets. So you can see, both the minority owner and the majority owner are in agreement as to what will happen when the offer to buy comes along.
Then I have one called the generational wealth – where you have the business being able to have rights of first refusal to retain ownership – often inside a family owned business. It is a sticky wicket to get into or out of – and that’s the point.
There are so many variants that we can make up a new type of operating agreement that we could make, like a ‘give it to the people’ where the company agrees to an ESOP to become an employee owned company at a certain point in time in the future. I guess we could set that one up for you. We’d have to research it though.
As you can see LLC Operating agreements are so flexible that you can adapt them for any situation your company needs – even compliance with certain social equity aspects of some state’s cannabis laws.
Remember that your company is just a ball of contracts related to a statute – a legally fictional person that gets to generate you money – but you’re responsible for bearing the risk as the entrepreneur.
We set up operating agreements to checkoff the statutory requirements of social equity in Illinois and even built in additional distributions for employees and the community to build our social equity operating agreements.
The reason you need an operating agreement when raising capital is because it tells your prospective investors exactly what your company is legally obligated to do.
That is the plan – the operating agreement spells out how it will all go down. From management, to new owners, to getting out of your ownership, dissolution of the company, everything.
In corporation terms, an operating agreement blends shareholder agreements and bylaws all together – but in theory, an LLC could do bylaws separately – in theory. And as we get to the intersection of these two different type of corporate entities businesses have at their disposal, we can finally answer of the question, can an LLC be run like a corporation?
So you can see that – yes, you can structure a LLC like it is a corporation – but it will be much more expensive than the couple page single member LLC operating agreement. The operating agreement has to blend agreements about new owners, types of owners, officers and directors, voting rights, tax consequences – so many things.
So why not just start with a corporation? You can, but they have greater formality, less flexibility, and easier exchange of your shares. An LLC can become a corporation – so if your first 5 years are expected to be you and your core team operating the business before it is geared up and sold, or who knows. Then you can start to set up the corporation as best you can, but borrower the flexibility and lack of formality that the LLC has, plus get more restrictive ownership, to keep your team together until you are ready to become a full on corporation that ends up getting sold for stock – a corporation can still buy an LLC.
Thomas Howard has been in business for years and can help yours navigate towards more profitable waters.
Our cannabis business attorneys are also business owners. They can help you structure your business or help protect it from overly burdensome regulations.
