Start Your CO LLC in Minutes

Before any revenue comes in is the best time to settle the issues that are hardest to resolve later. An operating agreement is less about legal formality and more about creating a shared set of expectations.

Here are the key decisions worth making up front:

1. Ownership

Decide:

• Who owns what percentage of the LLC?
• Is ownership based on cash invested, work contributed, or both?
• Will ownership change if someone contributes more later?

Example:

• You: 50%
• Partner: 50%

Or:

• You: 60% (larger capital contribution)
• Partner: 40%

2. Initial Contributions

Document:

• How much cash each person is putting in.
• Any equipment, intellectual property, or other assets contributed.
• Whether those contributions are capital (buying equity) or loans that will be repaid.

3. Future Funding

Agree on:

• What happens if the business needs more money.
• Whether members are required to contribute.
• What happens if one member can't or won't invest more.

Without an agreement, this can become one of the biggest sources of conflict.

4. Roles and Responsibilities

Spell out who is responsible for:

• Sales
• Operations
• Product development
• Marketing
• Accounting
• Compliance

Also decide:

• Is everyone expected to work full-time?
• Are there minimum expectations?
• What happens if someone stops contributing?

5. Decision-Making Authority

Determine:

• Can either member sign contracts?
• Who can spend company money?
• What purchases require approval?

For example:

• Either member can spend up to $2,000.
• Anything above requires unanimous approval.

6. Voting Rules

Not every decision needs unanimous consent.

Specify:

• Which decisions require majority approval.
• Which require unanimous approval.

Common unanimous decisions:

• Admitting a new member.
• Selling the company.
• Taking on significant debt.
• Amending the operating agreement.

7. Profits and Distributions

These are different concepts.

Profits:

• How taxable profits are allocated.

Distributions:

• When cash is actually paid out.

Many companies leave profits in the business for growth, so decide:

• How often distributions happen.
• Whether a minimum cash reserve is maintained.

8. Compensation

If members work in the business:

• Will anyone receive a salary?
• Are guaranteed payments allowed?
• When do salaries begin?

Don't assume equal ownership means equal pay.

9. Banking and Financial Controls

Agree on:

• Who has access to bank accounts.
• Who keeps the books.
• Who approves expenses.
• Whether two approvals are needed for large payments.

10. Bringing in New Owners

Set rules for:

• Issuing new ownership interests.
• Required approvals.
• Valuation.
• Whether existing members get first opportunity to buy new interests.

11. Exit Rules

Discuss while everyone is optimistic.

Answer:

• Can someone leave at any time?
• How is their ownership valued?
• Can the company buy them out?
• Over what payment schedule?

12. Death or Disability

Plan for:

• What happens if a member dies.
• Whether heirs become owners.
• Whether the LLC or remaining member buys the interest.

13. If Someone Wants to Sell

Usually include:

• Right of first refusal.
• Restrictions on selling to outsiders.
• Approval requirements.

14. Intellectual Property

Clarify:

• Who owns software, branding, inventions, customer lists, and other IP created for the business.
• Whether work created before the LLC remains personal property.

This is especially important for technology or creative businesses.

15. Confidentiality and Competition

Consider:

• Confidentiality obligations.
• Non-solicitation of employees or customers (where legally enforceable).
• Whether members can pursue competing businesses.

Enforceability varies by jurisdiction, so legal advice is valuable here.

16. Deadlock Resolution

If you're 50/50, decide what happens when you disagree.

Options include:

• Mediation.
• Arbitration.
• A trusted advisor acting as a tie-breaker for specified issues.
• Buy-sell mechanisms.
• "Shotgun" provisions (used carefully).

17. Dissolution

Define:

• When the LLC can be dissolved.
• How assets are distributed.
• Who handles winding up the business.

A practical conversation to have

Before signing anything, both founders should be able to answer questions like:

• What if one of us stops working after six months?
• What if one person wants to invest another $100,000 and the other doesn't?
• What if we receive a buyout offer?
• What if one of us wants to leave?
• What if one of us dies?
• What if we disagree on a major business decision?
• When do we start paying ourselves?
• How much money stays in the business versus gets distributed?
• Who can sign contracts or borrow money on behalf of the company?

If you can answer those questions clearly in your operating agreement, you'll have addressed many of the issues that commonly lead to disputes between co-founders.

If this is a two-person LLC with equal ownership, it's also worth considering a vesting arrangement. Instead of each founder owning 50% outright on day one, ownership can vest over time (for example, over four years with a one-year cliff). That way, if one founder leaves early, they don't retain half the company despite making a limited contribution. This approach is common for startups and can prevent significant problems later.

If you're starting a small online business, choosing the right legal structure affects your taxes, personal liability, paperwork, and how easy it is to grow. Here are the main options:

Business Structure	Personal Liability	Taxes	Complexity	Common For
Sole proprietorship	No liability protection	Income reported on your personal tax return	Very low	Freelancers, side hustles, very small businesses
Limited Liability Company (LLC)	Yes, generally protects personal assets	Flexible (default pass-through taxation; can elect corporate taxation)	Low to moderate	Most small online businesses
Corporation (C Corporation)	Yes	Separate corporate tax unless special election applies	Higher	Businesses seeking outside investors or planning significant growth
S Corporation	Yes	Pass-through taxation (if eligible)	Moderate to high	Established small businesses that may benefit from certain tax planning
Partnership	Generally depends on partnership type	Pass-through taxation	Moderate	Businesses with two or more owners

Sole proprietorship

This is the default if you start doing business on your own without forming a separate legal entity.

Pros:

• Easy and inexpensive to start.
• Minimal paperwork.
• Simple tax filing.

Cons:

• No legal separation between you and the business.
• Your personal assets may be at risk if the business incurs debts or is sued.

If your goal is to separate your business from your personal finances, a sole proprietorship generally does not accomplish that legally.

Limited Liability Company (LLC)

An LLC is one of the most popular choices for small online businesses.

Pros:

• Creates a separate legal entity from you.
• Provides liability protection in many situations if you maintain the business properly.
• Flexible tax treatment.
• Relatively straightforward to maintain compared with a corporation.

Things to keep in mind:

• Formation fees and annual filing requirements vary by state.
• You'll still want to keep business and personal finances separate by using a dedicated business bank account and maintaining appropriate records.

Corporation

Corporations provide strong legal separation but involve more formal requirements.

There are two common tax treatments:

• C Corporation: The corporation pays its own taxes. This structure is often used by companies planning to raise venture capital or issue stock.
• S Corporation: This is a tax election available to qualifying corporations (and, in some cases, LLCs). Income generally passes through to shareholders, potentially offering tax advantages in some situations.

Corporations typically require:

• Formal governance (directors, officers, meetings).
• More extensive recordkeeping.
• Ongoing compliance requirements.

Partnership

If you're starting the business with one or more other people, a partnership may be an option.

Different partnership types provide different levels of liability protection, so it's important to understand which type fits your situation.

Separating business finances

Regardless of the structure you choose, it's generally a good idea to:

• Open a dedicated business bank account.
• Obtain any required tax identification numbers.
• Keep separate accounting records.
• Use business funds only for business expenses whenever practical.
• Sign contracts in the name of the business entity (if you've formed one).

Which option is most common?

For many small online businesses, an LLC strikes a balance between:

• legal separation from personal assets,
• relatively simple administration,
• flexible taxation, and
• credibility with customers and vendors.

The best choice depends on factors such as your state, expected income, whether you'll have partners, and whether you plan to seek investors.

If you tell me:

• which country and state/province you're in,
• what you'll be selling,
• whether you'll have partners, and
• roughly how much you expect to earn in the first year,

I can help compare the options based on your specific situation.