Because the cannabis industry is young and rapidly growing, there is a tendency for businesses to be lax in their partnerships and see a handshake as “good enough” when it comes to sealing the deal. As founder of a law firm specializing in cannabis law and policy providing legal protection and compliance to brands, I have met with many potential clients who face surmounting legal battles with little chance of beneficial resolution which could have been prevented had there been an operating agreement between both parties. Having an operating agreement put in place from the start could be the difference between a fair split where both parties are compensated for their efforts and having to go to court in order to sever ties under a judge. At some point during the life of a business, issues will arise, and an operating agreement is an integral tool to help eliminate potential frustration and animosity, ultimately protecting all parties.

Importance of Operating Agreements

An operating agreement is a foundational legal document used by limited liability companies (LLC) to outline the rules and regulations by which the company and its owner(s) will operate or function. Operating agreements are similar to “prenuptial agreements” in necessity and are created to protect all parties in a “business marriage.” However, they are even more important for cannabis companies when it comes to function. Because the cannabis industry is so heavily regulated with an ever-changing legal landscape, it is essential that everyone understands the expectations from the outset of a business relationship.

An operating agreement can include almost any terms that a business wants it to include. Most attorneys will recommend  agreements stipulate the following:

1) Members of the company;

2) Decision making procedures by those members;

3) How finances are divided (this includes profit, loss and debt);

4) Milestones that each party should meet, including consequences for failure to meet those milestones, and;

5) Procedures, planning and desired outcomes in the event the company …

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