Sol Naciente’s Business Structure According to the Operating Agreement
The four friends wanted to have equal ownership and control over the business. They had always decided things by consensus but knew they needed a way to break a stalemate if one were ever to occur. Sol Naciente had some big decisions coming up (going into debt with the land purchase most prominently!), and they knew they needed a very clear, foolproof way to make decisions and resolve conflict.
So, in their Operating Agreement, they assigned each member one equal vote. In the case a unanimous decision couldn’t be reached, a supermajority (75% or ¾) vote would suffice for a decision to move forward. Any fewer votes and no action could be taken. However, for any decision where more than $10,000.00 in debt would be taken on, only a unanimous vote would suffice.
The group appointed one of the four members as an authorized representative of the business for a rolling 2-year period. This duty would change every two years. The authorized representative would be in charge of signing any documents on behalf of the business, maintaining the Annual Reports, paying the annual fees, and housing the business documents and financial files. Alejandro was the business’s authorized representative for the first 2-year term. The entire member-owner team had to authorize his actions at their monthly meetings. This decision was made simply to streamline business transactions. Alternatively, the group could have hired a manager to fulfill this role or required that they ALL sign for business transactions. Often, at least two people must sign to authorize payments or take on debt.
The Operating Agreement also spelled out issues like who they hired to mediate conflicts and what process was initiated if someone wanted to exit the business.
Also, in the Operating Agreement was a clear delineation of duties and responsibilities. Their end goal was for each owner to have a ‘sphere of influence,’ wherein that person would have decision-making control. Their interests were already breaking down along clear lines. So, for the Operating Agreement, they had to spell out what responsibilities each member-owner has. They attached self-written job descriptions to the Operating Agreement to avoid any confusion.
Here’s a snapshot of how they broke down farm duties so they all had about a quarter of the business’s responsibility:
Alejandro owns the tractor the farm will use and is interested in doing most of the tractor work on the farm and being responsible for maintaining it and all the equipment on the farm. He also loves figuring out plumbing issues, so he is eager to manage the irrigation system on the farm and develop a watering and fertilizing schedule for the farm.
As suggested earlier, Elena was tired of managing the fieldwork alone and wanted to turn her attention to developing a value-added product line. Maria had started the seeds of a CSA program and wanted to grow that program. Mateo was ready to increase his hours and take over the farmers’ market management from Elena and Maria. He was also eager to manage the seeding schedule and greenhouse. All four of them collaborate on the production schedule, cultivation, harvesting, and post-harvest activities as needed. In short, they developed what they consider to be an even split of duties and responsibilities where everyone has their own area of control. For example, Thursdays are CSA pack days, so Maria lets the others know at the Monday weekly meeting when she needs help harvesting and how many people she might need to help with packing boxes on Thursday. Likewise, Mateo plans what he will take to market and organizes Friday’s harvest and pack list.
An issue related to the ongoing breakdown of duties and responsibilities is how much each member-owner initially contributed to the business. The group decided that the contributions needed to be equal, as does the ongoing work of the farm. Elena’s two years of managing the fieldwork on her own earned her a contribution of ‘sweat equity,’ as she was making very little money during that time and really contributed a lot to the initial growth of the business. Alejandro retitled his tractor into Sol Naciente’s name, which was sufficient for his portion of initial business capitalization. Maria had added a lot of value to the farm with labor in the early days, building a reputation at the market and supporting the birth of Sol Naciente. Her sweat equity contribution wasn’t as high as Elena’s, so she also offered a cash payment to “buy in” to the business. Mateo bought into the business with a payment of cash.
Why Form an LLC?
We already know the group decided to form an LLC. But how did they come to this conclusion?
Alejandro owned a house down the street from the church and had savings from his off-farm job that he was nervous about losing. Farming full-time still seemed like quite a risky venture to him. He had heard somewhere that working with folks without creating a formal business structure was legally and financially risky. He didn’t understand exactly why, but he knew enough to know that his own savings and property might be at risk if they didn’t file to be a formal business. He was definitely the most risk-averse of the group and suggested early on that they start to look into forming a business structure that could limit their personal liability if anything were to go wrong at the farm.
Elena immediately jumped in to support Alejandro on this because she was already thinking about the risks value-added products might add to the business. She had already started looking into insurance for the cottage foods she wanted to produce, but she was also supportive of the liability protection a business structure provides.
Maria and Mateo were less concerned about liability protection since they both still rented and didn’t have extensive savings. They were on board, though, because forming a business structure created an air of seriousness about the business. They were very invested in ensuring everyone was committed to this new collaborative farm business!
In the beginning, the group considered maintaining the charity-based beginnings of the farm and creating a non-profit, educational farm that still provided free vegetables to the community. They also debated the benefits of choosing not to file for a formal business entity, which mostly amounted to not having to pay the state an annual fee. Corporation, cooperative, LLC? They considered it all!
In the end, they chose the limited liability company (LLC). This was the easiest business structure to form, and they found out, after consulting with a business coach, that an LLC could be structured much like a cooperative. Their governance document –the Operating Agreement– could spell out how they will fund the business, what happens if someone wants to leave, what needs to be done if they want to purchase big assets, and so much more! This document could be changed as needed. They all like the flexibility the LLC structure offers. In their state, the annual fees are $300/year. They decided they would continue to work on developing their governance document in their bi-monthly meetings but would wait one more year to file for their LLC. That is, unless they found the perfect property they wanted to buy before then!
Next, let’s discover how they find property and begin the FSA FO loan process