An LLC Operating Agreement is a document that establishes guidelines for a Limited Liability Company such as the statement of intent, membership duties, and operations. By incorporating an Operating Agreement you will be able to achieve your business’ goals in optimal time and within your budget.
This article will offer you the information that you need to understand everything about this type of documents in further detail.
What is an LLC Operating Agreement?
An Operating Agreement aims to govern the internal operations of the business in a customized way according to the need of the company owners, referred to as members. The members of an LLC use Operating Agreements to outline the business’ financial and functional decisions. This type of agreement includes rules, regulations and provisions for the company.
Whether the LLC is single-party or has multiple members, creating an Operating Agreement will add value to the company by creating an efficient system for decision-making.
“Organization has to come from an agreement about principles, rather than just the need to coordinate: so as much as we must all act today in a concerted manner, that should not be the ground of an organization”
The Importance of an LLC Operating Agreement
The requirement of an Operating Agreement depends on the territory where the LLC is formed, but its importance reaches beyond this reason. A business that outlines its own Operating Agreement, even if its a business with a single owner, will be provided with timely solutions. Without an Operating Agreement the business will be governed by the default rules set by state law, which may not be the most appropriate rules for your specific business.
As a member of an LLC, an Operating Agreement will define and clearly separate your business’ and personal assets in the case that the company is sued or acquires debt. Furthermore, several banks also require that an LLC have an Operating Agreement to open a business account.
Designing an Operating Agreement will help your LLC to earn credibility and reassure that the court supports and sustains the status of the company. Also, these agreements can assist you in preventing misunderstandings by creating specific expectations about the partnership’s responsibilities and roles.
Elements of an LLC Operating Agreement
An LLC can achieve a business structure with personal protection by creating an Operating Agreement with the following basic elements:
- Details of Company Formation: This element includes the information related to the creation of the company such as members of the company and the company’s creation date. In the case that there are several members of the company, each of the members might have equal ownership or separated amounts of ownership units. In many cases, the LLCs assign a percentage of ownership according to the percentage of capital invested in the business. The distribution of profits is often directly related to ownership percentage as well. In both cases, this is arranged according to the owners’ consideration of fairness and settled in this article.
- Voting and Management: This section specifies the management structure and members’ roles and responsibilities. To declare how the business works, an LLC can be member-managed, or manager-managed. It’s important to define the roles and responsibilities of all the members from the inception to avoid future disagreements. The company can choose to make decisions via the voting process. The votes can also be counted as one vote per unit of ownership or one vote per member. Also, the LLC may define the number of votes that are required to take action by the company.
- Capital Contributions: This section specifies the amount of money that each member has contributed to starting the company. It also mentions the details about any additional funds that could potentially be gathered by the members and the procedure for allocating stake in the company based on these contributions. This section discusses the profits and losses of the company, physical property, money and all the assets involved. It also includes the distribution amongst the members.
- How To Change Owners: If one of the members of an LLC decides to withdraw, the LCC will be dissolved by default. This could leave the entire company in disrepair, especially if the remaining members want to continue the conducting business. This section considers potential exits, the distribution of their LLC share, and compensations for withdrawal. It also addresses whether a member can leave the LLC voluntarily and if they can legally compete against the LLC after departure. It further specifies how the assets will be distributed and the procedure for the admittance of new members.
- Dissolution of the LLC: This section will define the events or voting outcomes that can lead to the cancellation of the LLC. Usually, these agreements detail how the LCC’s assets will be distributed in the case of dissolution.
The Bottom Line
Operating Agreements can be considered as living documents. While running a company, business owners can change and update their agreements to reflect modifications related to members’ roles, the distributions of profits and losses, administrative alterations, etc. By keeping your LLC Operating Agreement updated to reflect the current standing of the company, you will be better prepared to handle questions or misunderstandings regarding the company’s performance. ContractAwesome provides easy-to-use features to manage live contracts.
LLC Operating Agreements can cover the necessary bases while remaining brief and straight-forward. These documents will remain essential to explaining and understanding the roles and responsibilities of the various members. The Operating Agreement provides the guarantee that your personal affairs and business assets shall remain separate.
This document allows the members of an LLC to specify the rules and operations of the company as a reference, in case members decide to withdraw, the company dissolves or a new member is incorporated.
By agreeing to all the terms displayed in an Operating Agreement, the company members are provided with the tools to avoid discrepancies about how the business is conducted as well as how future profits and losses will be distributed.