Operating Agreement For your Commercial Cannabis Business

Starting up a new business takes a lot of time, money, and planning. There are many steps that need to be taken to ensure that your new company runs smoothly, especially in regulated industries like the marijuana industry. Creating a commercial cannabis business operating agreement to meet your company’s unique and specific needs is one of the most important steps your cannabis business should take.

Need help drafting a commercial cannabis business operating agreement? Do you require other cannabis corporate legal services? Request a consultation now.

What is an operating agreement?

An operating agreement is a written agreement that defines the relationship between business owners and the procedures for the management and operation of the LLC.

What is included in an operating agreement?

An operating agreement brings formality to your business.

It outlines the governing rules that the members and/or managers will use to run the business.

The core elements of an operating agreement include:

• provisions relating to equity structure (contributions, capital accounts, allocations of profits, losses and distributions)
• management
• voting
• limitation on liability and indemnification
• books and records
• anti-dilution protections
• and if any, restrictions on transfer, buyouts, dissolution and liquidation, confidentiality and restrictive covenants, and other general provisions, such as governing law and dispute resolution.

Your operating agreement can answer important questions like:

• Do owners ever have to contribute their own money to the business?
• What if additional investment is necessary?
• What do you do if an owner isn’t following company guidelines? Can they be voted out of the company?
• How will disputes be settled?
• What happens if an owner dies?
• What is the ownership percentage of each member?
  

Why is an operating agreement so important?

An operating agreement is an extremely important tool for the following reasons:

(1) It determines how the members/owners want the LLC internally governed

(2) It puts these directions in writing in case there is a disagreement among members down the road and

(3) It gives you the ability to create the company you want, set the rules that you want, and establish the guidelines that are best suited for your new company.

In addition, boilerplate agreements fail to address many of the most important issues for cannabis businesses, like how disputes are settled.

In the cannabis industry, arbitration is a preferred way to handle disputes, as it’s a form of alternative dispute resolution where disputes are settled outside of the courts.

Including an arbitration clause in your operating agreement reduces the risk that the contract will be tossed out by a court as being for an illegal purpose.

What happens if I don’t have an operating agreement?

Creating this type of agreement can seem like a tedious or low priority task, especially if you’re going into business with a spouse, family members, or close friends.

You need an experienced, proven corporate cannabis attorney to protect yourself and your business.

However, failing to have an operating agreement can jeopardize everything you’ve been working for.

If the LLC members don’t adopt an operating agreement, or if the agreement fails to cover every essential area, then the default provisions of Michigan LLC law will take effect.

These provisions will control how the LLC is structured and operates, which may not be in the manner that the members envisioned when the company was created.

An example of a default rule used in a lot of states is the requirement for any profits or losses to be divided equally among the owners without considering how much each member has invested in the business.

Most businesses wouldn’t like to see this happen, especially if some owners had invested more than others.

For these reasons, a thorough operating agreement is a practical necessity for your cannabis business, even if it’s not a legal requirement in Michigan.

It lays out and defines, in concrete terms, exactly what the expectations and obligations of all of the involved parties are, as well as putting financial protections in place.

Need help drafting a commercial cannabis business operating agreement? Do you require other cannabis corporate legal services? Request a consultation now.