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What is an LLC Operating Agreement? (Get a Free Custom Operating Agreement) - YouTube
Channel: TRUiC
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- [Presenter] Owner disagreements,
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ambiguous responsibilities,
personal lawsuits,
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these are some of the
problems that can emerge
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when you start a business.
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An LLC Operating Agreement
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can help prevent many of
these problems from arising.
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In this video, we'll go over
what an operating agreement is,
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why you need one,
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what elements make up
an operating agreement,
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why it's a living document,
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and how to get a custom
operating agreement for free.
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The following is for
informational purposes
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and is not meant as legal or tax advice.
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Before acting on any of these information,
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please consult with your lawyer.
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(gentle tune)
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What is an operating agreement?
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An LLC Operating Agreement is a document
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written on behalf of its owners,
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who are defined as members of the LLC
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that establishes ownership of the LLC,
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outlines the rules by which
you govern your business,
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and clarifies the duties and
responsibilities of members.
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Why should you create
an operating agreement?
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Some states legally require an LLC
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to have an operating agreement,
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usually for Multi-Member LLCs.
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However, you are not required to file it
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with the Secretary of State.
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But even if your state does
not legally require your LLC
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to have an operating agreement,
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there are still many
reasons to create one.
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For Single Member LLCs,
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an operating agreement gives
your business credibility.
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An operating agreement strengthens
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what is known as the corporate veil.
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This can help prevent people
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from going after your personal assets
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in the event of a lawsuit.
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For Multi-Member LLCs, not only
does an operating agreement
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strengthen your corporate
veil and add credibility,
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it also prevents misunderstandings
by having clear rules
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on the responsibilities
of different members
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and how things will be voted on.
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Additionally, as your
company evolves and grows,
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you may need to provide a copy
of your operating agreement
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when working with investors,
lawyers, and courts.
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What's in an operating agreement?
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There are six important
sections or articles to consider
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when creating an operating agreement.
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It's a good idea to be
familiar with this information
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but you don't need to memorize it
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since we have guides and
templates on our site
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that will walk you through the process.
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Let's go through each article one by one.
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Article 1: Organization.
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The first article deals with
the creation of the company,
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which state it was formed in,
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when it was formed, and
who the members are,
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as well as their ownership interests.
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Two common ways of expressing
ownership interests
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are percentage ownership
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that will add up to 100%
between all members,
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or membership units, which are
similar to shares of stock.
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Each member or owner will
be listed in this section,
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along with the units and
percentage of the company
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that the particular member owns.
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This can translate to voting rights
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and a share of the company's profits.
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Article 2: Management and Voting.
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In this article, there will
be three things covered,
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whether the LLC will be
member-managed or manager-managed,
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how voting in the LLC will work,
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and what you'll be voting on.
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Firstly, an LLC can be managed
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by its members or by appointed managers.
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If the LLC is manager-managed,
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this article also details
the authority of the manager
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and how the manager can be voted out
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by other members of the LLC if so desired.
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Next, this article outlines
company voting policies.
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This is how the company votes on issues
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that require a group decision.
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You'll need to decide if voting rights
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are calculated by the number
of LLC units owned by members
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or per capita, i.e. one vote per member.
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You will also decide
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whether the votes need to
be unanimous or majority.
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Finally, this will detail what
actions are to be voted upon
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and what is to be decided by the manager.
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This can include amendments
to the operating agreement,
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mergers or dissolution,
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new members, sale of assets, and so on.
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Article 3: Capital Contributions.
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The third article addresses
which members have given money
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to start the LLC in the form
of capital contributions.
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This section will also explain
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how additional money can
be raised by the members.
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For example, additional
capital might be raised
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by issuing additional LLC
units to existing members
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in exchange for capital contributions
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or by issuing additional
units to new members.
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Article 4: Distributions.
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The fourth article describes
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how the company's profits and losses
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are shared among members.
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This might include money,
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physical property, or
other business assets.
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Profits and losses may be
allocated among members
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proportional to their LLC unit percentage
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or by some other metric.
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It will also cover distributions,
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money allocated to
members from time to time
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when deemed appropriate.
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Again, it will need to be decided
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if this is proportionate to
each member's unit percentage
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or by another metric,
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i.e. if some members work
in the LLC and others don't,
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those members who work in the LLC
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may receive an extra distribution.
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This section will also make it clear
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that distributions and allocations
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will still need to follow and
account for tax requirements
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and fulfill outstanding debts
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so the company does not go bankrupt.
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Article 5: Membership Changes.
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The fifth article details the process
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for adding or removing members,
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if and when members can transfer
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their ownership of the company
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and what happens if a
member dies, and so on.
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This process is related
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to the voting procedures
outlined in Article 2,
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and will acknowledge any documentation
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that must be made with these changes.
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This section can also cover
the transfer of LLC units,
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how members can
voluntarily sell, transfer,
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or assign part or all of
the membership interest.
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Lastly, you may want to cover
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how a member can voluntarily
withdraw from the company
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and whether they should
get a distribution payment
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if they do so.
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Article 6: Dissolution.
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This section of the operating agreement
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will explain the circumstances
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in which the company may
or must be dissolved.
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This is sometimes called
winding up the affairs
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of the company.
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If the company has assets,
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this section may also detail
how they should be distributed
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when the company has been wound up.
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Why an operating agreement
is a living document.
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Now you've seen the basic elements
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that make up an operating agreement.
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It is important to understand,
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however, that an operating
agreement is not set in stone.
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It is meant to change and
evolve as your business grows.
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This is why it is known
as a living document.
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Dynamic changes allow
the flexibility of an LLC
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to work for your business
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and not keep you locked into
an unfortunate situation.
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Changes can be made to the document,
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but make sure that all members of the LLC
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sign off on the new changes
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according to the voting requirements
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outlined within the existing
operating agreement.
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You can also hire an attorney
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to fine-tune the operating agreement
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if things become overly
technical or complex.
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How to create an operating
agreement with our free tools.
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You don't need to write
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your own operating agreement from scratch.
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We provide both templates
and a free online tool
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to help you format
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a custom operating
agreement to get started.
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Many LLC formation companies
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offer operating agreement templates
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and you can also hire an attorney.
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Of course, both of these
options will cost you money
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and lawyers can be very expensive.
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To save time and money
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while knowing that you can always update
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your operating agreement in the future,
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you can use our free tool
at HowToStartAnLLC.com.
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The tool will walk you through the process
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in an easy-to-understand manner,
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both for a single member
and multiple member LLC.
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Once you enter your information,
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you'll get a custom formatted
operating agreement PDF
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with all of your information,
or you can also use
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our existing operating agreement templates
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that you can download and
adjust to your preference.
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We provide lots of tools and resources
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to help you accelerate your
small business, free of charge.
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We would love to see you succeed
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in your entrepreneurial dreams.
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Thank you for watching.
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Give us a Like and subscribe,
and leave a comment below
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if there are any other
small business topics
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you would like us to cover.
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Good luck starting your small business.
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