Restaurant Law Blog

Most restaurants operate as a limited liability company with the expectation that its members will be protected from personal liability.  Despite this many owners never enter into an operating agreement with their business partners, or alternatively enter into a poorly drafted agreement that does nothing to guard their perceived limited liability status. A major reason to have an operating agreement is to ensure that courts will uphold your limited personal liability especially if you are a single member LLC which resembles a sole proprietorship.

Perhaps the most significant reason to have an operating agreement is to make sure that you and your co-members have established protocols and procedures for how the business is to be run. Without a detailed operating agreement the members may be unable to settle their misunderstandings over finances and management, meaning that New York's Limited Liability Company Law will govern these issues, and frequently this is bad for all members. 

Some sample considerations to be resolved in your operating agreement include:  (1) How will tasks be assigned and whose ultimate responsibility will it be to see that each task is completed? (2) Who makes the final decisions and on what issues? (3) What will each partner commit to the partnership (i.e. time, month or both)? (4) Will the partnership be an equal percentage partnership? (6) How will profits be calculated? (7) How and when will profits be divided? (8) Will the partners receive salaries and if so, will salaries be paid while the business is in the building process? (9) When disagreements arise, how will they be handled, and who has final say? (10) How are voting rights established and who will have the ultimate decision making authority on employee complaints? (11) Will each partner be required to ‘buy into’ the partnership? (12) What will the ongoing financial responsibilities of the partners be to the partnership? (13) Will bonuses be issued and if so, how often and by what measure? (14) What expenses will the partnership cover for the partners? (15) What is expected of each partner with respect to the advertising and marketing of your business? (16) What are the hours each partner is expected to work?  (17) Will the partnership agreement contain a buy-sell provision to protect the partnership in the event of a partnership breakdown or the bankruptcy, death or divorce of one of the partners? (18) What happens if a partner becomes disabled and is no longer able to contribute to the partnership? (19) Will the partnership agreement be flexible so that rewards and control fluctuate with the contribution and assumption of risk of the respective partners?