Thinking about how to start a logistics business? First, you set up your new business as an official legal entity. Right after, an operating agreement is very important. Especially if you are going into business with a partner. What do you need to consider when learning how to start a logistics company and set up an operating agreement? We’ll explain in this article.
How to start a logistics business: the necessity of LLC operating agreements
Depending upon the state that you are running your freight broker business in, you may be required to create an operating agreement for your company. But, even if you’re not, it’s still a good idea so that you and your partners have a clear understanding for how things will and should work.
By setting the rules at the very beginning, you can protect yourself from a myriad of issues that, while may not be probable, could in fact become reality down the line. The future is anything but certain. Starting a business in the first place is taking a risk. Setting up an operating agreement is an act in reducing your risk. Take it seriously. Because, even if you choose to pass on creating an operating agreement, the state you do business in may have default laws to govern the way your business should be operated. This is your opportunity to set your own rules, and to have the company run your way.
How to start a logistics business: Laying out the Ownership and Management
One of the most important reason for having an operating agreement when learning how to start a logistics business is division of ownership. Put simply, how much of the business profits go into your bank account, vs how many go into your business partners’ back accounts? In addition, the operating agreement of your freight broker business should clearly define managerial structure. Processes for decision making about the business as well as what would happen if an owner wants to leave a business, should be defined. If you chose to go without an operating agreement, you may run into problems when you are making record profits, or if your partner chooses to leave.
Avoid State Default Rules
In many states, the default role for division of profits is that they are divided equally among all owners, regardless of interest. By setting up your own operating agreement, you can clarify that the shares of profits and losses be split according to percentage of ownership of each member.
Elements to Include in LLC Operating Agreements for freight brokerage businesses
Every operating agreement will be a little different, since even businesses in the same line of work are different. That being said, there are a few essentials that are contained in the majority of operating agreements. These terms include:
- A breakdown of the ownership percentage of each LLC member;
- The rights and responsibilities of the LLC members;
- A detailed plan explaining the distribution of losses and profits;
- The voting rights of all LLC members;
- The management plan for the freight brokerage business;
- Rules for meetings voting rights
- The buyout or buy-sell rules that govern when a member’s sale of an ownership stake, or a member’s death or disability.
Most often, each individual’s ownership percentage will be determined by the amount they contributed at the start of the business, compared to the total amount given by all members. But, you don’t have to do this. You can set up the ownership percentages in any way you would like. Just as long as it is written out and agreed to by all members who have an interest in the business.
Shares of Profits and Losses
This is most often referred to as a distributive share. Under most LLC operating agreements, a member’s distributive share is often just a simple calculation under their ownership percentage. If they own 25% of the company, they would take on 25% of the losses.
Profits and Losses Special Considerations
You may also want to make some special arrangements within the operating agreement that deal with unique situations. The operating agreement should dictate how much of the distributive share a member is allowed to take each year.
If, for example, the business is new, you may want to consider limiting each member to only taking half of his or her distributive share each year. So, to follow the above example, a member who owns 25% of the profits would only be allowed to take 50% of his distributive share, leaving the remainder of the capital in the bank to help aid growth of the business.
Meetings and Voting Rights
The operating agreement for your freight brokerage business should lay out details about how often formal meetings are to be conducted, and voting rights for decisions made in those meetings. In general, there are two voting rights agreements that LLCs commonly use. In the first example, each member votes their membership percentage. When you use this scheme, a person with a 35% ownership share has much larger voting power than a person that only has 5% ownership share. The other option is where each member gets one vote, regardless of the size of their ownership shares.
Transitions of Ownership
Freight brokerage businesses can see people come and go. It’s not entirely uncommon when learning how to start a logistics business to make sure your operating agreement states the procedures required for transition of ownership. Often times, operating agreements have different procedures for this, depending on the circumstances. What if someone dies? It’s not pleasant to think about, but for the sake of clarity in your business dealings, it’s necessary. What happens most often is operating agreements include simple buyout schemes that allow continuing owners to buy out the ownership share of a member that is leaving the company.
How to start a logistics business: Creating an Operating Agreement
Hopefully this article has helped give you an overview of what you should need when you do create that operating agreement as you learn how to start a logistics business. But, it would be extremely wise for you to work with a business or commercial law attorney to make sure you’re not leaving out anything essential to your specific business. You may want to consider a service like LegalZoom first. For $30 a month, you can speak with an attorney fluent in your area of need who has been rated by previous customers. Something to consider before sitting down with someone who will charge you $100 an hour or more.
Next: How to start a 3rd party logistics company: Infrastructure to Get Started
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