My operating agreement is pretty basic. It covers ownership percentages and voting but nothing about what happens if a member dies or becomes incapacitated. I'm the managing member and the other two are silent partners. We're all in our late 50s to early 60s. I've been putting this off for a year and I know I need to just do it. Has anyone here actually updated their OA for succession? What did you include?
Succession
I should probably add succession instructions to my operating agreement
Buy-sell provisions are the big one. Without them, if one of your silent partners dies, their spouse or kids could inherit a stake and you'd be stuck with them. You need a valuation mechanism and a funding source (life insurance is common).
How long have you been putting it off, exactly?
A year, maybe longer. I know it's bad. I keep thinking I'll get to it when things slow down, and they never slow down.
I used a lawyer for ours. Cost about $1,800. It was worth it. We had a similar setup and he pointed out that our OA didn't even have a transfer restriction or a dewth provision. We added a right of first refusal and a mandatory buyout if a member becomes disabled. Also spelled out how the valuation would work: a formula based on trailing revenue rather than a full appraisal, which kept it cheap. If you're managing partner I'd also look at what happens if YOU're the one who goes down. Who steps in? Most templates don't address that.
Following.
One thing the lawyer walked us through was making sure the buyout doesn't trigger a big tax hit. Deferred payments or an installment structure helped. Also the heirs should be required to sell, not just have the option. Otherwise you're asking for trouble.
How many members are there? If it's just three, you could even treat it as a partnership issue rather than corporate. The mechanics differ. Either way, get it in writing before something happens, not after.
There were three of us, same as you. One passed two years after we updated the OA. I can tell you it made a horrible situation manageable. Without it his wife would have had a seat at the table.