Leave a Legacy: What’s an Official Operating Agreement?

September 30, 2011 12:00 PM

Kevin SpaffordQOur farming operation is not large. My brothers and I raise corn and soybeans in the Midwest. My oldest brother’s sons work with us. My middle brother’s daughter doesn’t have any interest in the farm, and my son just started high school. We’re still in growth mode. The next generation will be the fourth to farm this ground. We’re not sure where to start [planning for succession], but we do want to make sure we’re doing it right.

You’ve mentioned that a farm should have a corporate-like management structure because formality allows the owners to be less emotional when making family employment decisions. You’ve rattled off a string of documents that every operation should have, including an operating agreement. What’s an operating agreement, and how do I create one?

A:  In workshop presentations, I often refer to some of the personnel management tools used by larger companies as keys to sound management. Since family leadership and business management are two completely separate jobs, these tools allow owners to use pre-established guidelines to manage the operation.

A family business should use four of these key elements to help the leaders manage the operation, especially personnel decisions. The family component of a farming operation is both a strength and a weakness. Family is often the motivation that holds the operation together and provides an employee base. The weakness comes from an instinctive desire to work with, nurture and care for the dependents. Yet, employing a person in the wrong job and for the wrong reasons will only lead to bad results.

A well-structured business has: (1) a family employment policy; (2) job descriptions;
(3) an employee manual; and (4) an operating agreement.

A family employment policy is a prenegotiated understanding of how, when and under what circumstances a family member might be eligible for employment. Though not legally binding, it is drafted by the owners and presented to family members as a written guide for measuring who is eligible for employment.

Job descriptions spell out the duties and responsibilities of each position, including pay, benefits and performance evaluations. Job descriptions are important but often overlooked in a family operation. Senior leaders expect family members to be actively involved, but they forget that young folks need direction and guidance.

An employee manual contains the family employment policy and job descriptions. In large operations, it details how promotions are handled and expectations for professional
development and education.

An operating agreement is a legally binding document that the owners agree to follow when making important decisions. The term "operating agreement" often refers to an LLC. In a corporation, it refers to bylaws, and it can also refer to an agreement between partners. An operating agreement helps business owners make objective decisions and manage contentious issues in a structured way. It can also:

  • spell out an owner’s rights, duties and obligations.
  • detail decision-making authority, conditions and processes.
  • ensure that the entity is distinct and separate from the owners.
  • keep the government from settling disputes, dissolutions, etc., which are governed by state statutes or default rules, if no agreement exists.
  • remove subjectivity, ensure objec-tive reasoning and inform owners, employees and applicable family.

To tailor an operating agreement for your farm operation, download the "Operating Agreement Design Tool."


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