Drafting an Operating Agreement for Machinery and Labor Sharing

It is a good idea to have an operating agreement that spells out as many details of your sharing arrangement as possible. This will help you discuss important issues upfront and provide a basis for resolving potential conflicts that might arise in the future.

A basic sample operating agreement for any business type includes language about the parties involved, management of the business, member voting procedures and rights, and dissolution. While there are many templates for operating agreements available, it is important that you take the time to tailor the agreement for your specific needs. In addition, you should seek the advice of your legal counsel before signing the agreement. Other areas that you might want to consider, include, expand or at least discuss in the decision making process with potential partners and legal consultants include:

  • Business Organization: What type of business and legal structure is most suitable for the business venture you are looking at and how might this need change over time?
  • Capital Contributions: How much is each member expected to contribute initially? Will only cash be acceptable, or will you accept equipment contributions? How will contributions be valued? When and how often will contributions be expected? What will the mechanics of timing of payments, minimum requirements, and is there the possibility of additional calls for capital?
  • Land Holdings: How will unequal land holdings be dealt with? Will you charge an hourly or per acre rate for machinery use to compensate for differences in use? Will the differences in ownership equity be adjusted? What provisions will be made for renting or buying new acres that will be farmed by the group? Can land be subleased to the group’s farming entity? How will the rate be determined?
  • Profits and losses: Is the company designed to make money and if it is, how and when will the money come out? Tied together with the allocations of profits is the allocation of losses. How will the company deal with losses? Does it have the right to require more equity be contributed by the members? What happens if a member fails to send the money?
  • Rights to file suit: Do you want to limit the legal rights of members such as requiring them to go through arbitration before filing suit? Do you want to restrict them to “binding arbitration?”
  • Transfer of membership interest: Can I sell my shares to anybody? Does the company have any special rights to buy back? At what price? Are there provisions to dissolve the company, provisions for retirements, death or insolvency of a partner?
  • Spouses: What are the expectations for spouses? Do they need to sign loan documents? Are they legally bound to the terms of the agreement? Are they required to sign so they have full knowledge of the terms?
  • Termination and dissolution: Is there a specific life of the company? If the members decide to liquidate the company, what are the steps necessary and how would it be handled?
  • Personnel: Are you going to hire anyone to work for the company? Who is responsible for recordkeeping, machinery repairs, etc.? Is there a business manager? How will the manager be compensated?
  • Insurance: What insurance does the company need (i.e., Board of Managers, individuals) and how will these costs be allocated?
  • Recordkeeping: How will it be handled, by whom, who has access to records, frequency of reports?
  • Meetings and Communication: How often will you have formal meetings? What business can be done at informal meetings? What is the standard procedure for communication? How are “emergency” decisions made?
  • Financing: Who is authorized to make financial commitments? Where will banking occur? Who will handle the finances? What kind of reports will be generated and how often? Who has access to the books?
  • Replacement of equipment: Is there a plan on how and when the decision to replace equipment will be made? How will the costs be allocated?
  • Use of equipment outside the system: What if a member wants to use a piece of equipment for outside custom or contract work? Is it allowed and if it is, what is the fee?
  • Day to Day issues: How will repairs and repair costs be handled? What about servicing, storing, transporting and scheduling of equipment and operations? Who decides?