As a new business owner, it`s important to understand the legal agreements that are necessary for setting up and running your company. Two important documents to know about are the founders` agreement and the operating agreement. Although both agreements serve to outline the terms and conditions of your business, they are quite different in their scope and purpose.

Founders` Agreement

A founders` agreement, as the name suggests, is an agreement that is made between the founders of a company. This agreement outlines the terms and conditions that govern the ownership, management, and operation of the business. It is usually established at the very beginning of the company`s formation, and it is meant to prevent future conflicts between the founders.

A founders` agreement typically covers the following:

– Equity allocation: This outlines how equity in the company is divided between the founders. It also covers how additional equity will be granted or dilution will be managed in the future.

– Roles and responsibilities: This section outlines the roles and responsibilities of each founder, including how decisions will be made and how voting power is distributed.

– Intellectual property: This section ensures that the intellectual property created by the founders remains with the company and not with individual founders.

– Restrictive covenants: This section lays out any restrictions placed on the founders during or after their tenure with the company.

Operating Agreement

An operating agreement, on the other hand, is a legal document that governs the day-to-day operations of a business, particularly for limited liability companies (LLCs). This document is crucial for ensuring that the company operates smoothly and that all members understand their roles and responsibilities.

An operating agreement typically covers the following:

– Member roles and responsibilities: This outlines the roles and responsibilities of each member, including how decisions will be made and how voting power is distributed.

– Contributions and distributions: This section outlines how members will contribute to the company, how distributions will be made, and how profits and losses will be allocated.

– Management structure: This section outlines how the company will be managed, who will be responsible for day-to-day operations, and what types of decisions will require member approval.

– Dissolution: This section outlines what will happen if the company is dissolved.

Key Differences

The main difference between the founders` agreement and the operating agreement is that the founders` agreement focuses on the relationship between the co-founders while the operating agreement focuses on the day-to-day operations of the business. Additionally, the founders` agreement is usually created when the company is formed, while the operating agreement is created once the company is up and running.

Another key difference is that the founders` agreement is usually more flexible than the operating agreement. The founders` agreement is meant to be a framework for the company`s operations that can be adjusted or amended as needed. The operating agreement, on the other hand, is a binding legal document that outlines the rules and regulations of the company and cannot be changed as easily.

Conclusion

Overall, both the founders` agreement and the operating agreement are important legal documents that should be tailored to meet the needs of your business. While the founders` agreement focuses on the relationship between the co-founders, the operating agreement sets out the rules and regulations that govern the day-to-day operations of the business. Be sure to consult with a legal professional to ensure that your agreements are comprehensive and legally binding.