What is an LLC operating agreement?
An LLC operating agreement is a document that customizes the terms of a limited liability company according to the specific needs of its owners. It also describes financial and functional decision-making in a structured manner. It is similar to the articles of incorporation that govern the operations of a company.
Although the writing of an operating agreement is not a mandatory requirement for most states, it is nonetheless considered a crucial document which should be included when setting up a limited company. The document, once signed by each member (owners), acts as a binding set of rules to be followed. The document is written to allow owners to govern internal operations according to their own rules and specifications. The absence of this document means that your business must be managed according to your state’s default rules.
Operation of LLC operating agreements
An LLC is a type of American business entity that is easy to set up and manage, and significantly limits the liability of owners. Since an LLC is a hybrid of a partnership and a corporation, it offers the dual benefit of direct taxation with limited liability.
To take full advantage of setting up an LLC, you need to go further and draft an operating agreement during the start-up process. Many tend to ignore this crucial document as it is not a mandatory requirement in many states. Only a few states specify the need for an operating agreement (California, Delaware, Maine, Missouri and New York). But make sure it’s what you want before you continue.
The operating agreement is therefore a document which specifies the terms of a limited liability company (LLC) according to the members. It indicates the path to follow for the company and brings more clarity in operations and management. An LLC operating agreement is a 10 to 20 page contractual document that defines the guidelines and rules of an LLC.
In states such as California, Delaware, Maine, Missouri and New York, it is mandatory to include this document during the incorporation process. Although most other states do not insist on including it, it is still considered wise to write an operating agreement because it protects the status of a business, is useful in cases of misunderstanding and helps lead to well the business in accordance with established rules. by you.
Companies that do not sign an operating agreement are subject to the default rules defined by the states. In such a case, the rules imposed by the state will be very general in nature and may not be suitable for all businesses. For example, in the absence of an operating agreement, some states may stipulate that all of the profits of an LLC are shared equally by each partner, regardless of the capital contribution of each party. An agreement can also protect partners from any personal liability if it appears that they operate as a sole proprietorship or in partnership.
An operating agreement, once signed, must be kept securely as an important business file.
Key points to remember
- An LLC operating agreement is a legal document that defines the terms of a limited liability company for members.
- It indicates the path to follow for the company and brings more clarity in operations and management.
- In certain stands, the operating agreement is required as part of the creation of the commercial entity.
- LLC operating agreements have certain standard sections with standard language, but one size does not necessarily work for everyone.
Special Considerations: The Format of the LLC Operating Agreement
Many issues need to be addressed in the LLC operating agreement. The general format of the document includes the following:
- Property of each member expressed as a percentage
- Member responsibilities and voting rights
- A presentation of the duties and powers of the members
- Distribution of profits and losses among members
- Rules for holding meetings and voting
- Problems with managing the LLC
- Redemption and buy-sell arrangements, when a member wishes to leave and sell their share (should also include what will happen in the event of a member’s death)
LLC operating agreements should also describe the specific definitions of terms used in the agreement, as well as the list of business objectives, a statement of its intention to form, how it will deal with new members, how it will choose to be imposed, how long it intends to operate and where it is located.
Just like “one size fits all”, the LLC state default rules don’t work for everyone. The best way to deal with this problem is to write an operating agreement, which gives freedom, protection and control to your business. While it’s best to include an operating agreement in the initial stages, if you missed it, it’s never too late to put it in place, as long as all members agree to it. The document can also be edited at a later stage with the advice and assistance of a lawyer.