Operating Agreement Waterfall Provision

Публикувана на 23.05.2022

As a business owner, having an operating agreement is essential for protecting your company`s interests and ensuring smooth operations. One key aspect of an operating agreement is the waterfall provision.

The waterfall provision is a section in the operating agreement that outlines the order in which profits, losses, and distributions are distributed among members or owners. This provision is important because it defines how money is distributed during various events, such as liquidation or sale of the company, and can prevent disputes among members down the line.

Here is a breakdown of how the waterfall provision typically works:

1. First, any outstanding debts or obligations of the company are paid off.

2. Next, any taxes owed by the company are paid.

3. Then, profits or losses are distributed according to the membership interests or ownership percentages of the company. This means that those with a higher percentage of ownership will receive a larger share of the profits or losses.

However, the waterfall provision can also be customized to fit the specific needs of your business. For example, you may want to prioritize certain members or owners over others, or set up a tiered system based on the amount of capital contributed.

It is important to consult with an experienced attorney when drafting your operating agreement and waterfall provision. They can help you determine the best structure for your business and ensure that all legal requirements are met.

In summary, the waterfall provision is a crucial aspect of any operating agreement. It determines how profits, losses, and distributions are distributed among members and owners, and can prevent disputes down the line. Consult with an attorney to customize your waterfall provision to fit the specific needs of your business.

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