Operating Agreement

Operating Agreement

The operating agreement is a key document used by LLCs. This document outlines all of the financial and functional decisions of the business. In your operating agreement, either you or your co-owners will establish the percentage of ownership in the LLC. It will also outline shares of profits and losses as well as what will happen to the business if one of you leaves. This might include rules, regulations, and provisions. The purpose of the document is to govern the internal operations of the business exactly how the owners wish to do so.

Why Do You Need an Operating Agreement?

Protect limited liability status of business

The main reason that you would want to make an operating agreement is to make sure that your personal assets are protected. This comes into play when you are looking to have the courts respect your limited personal liability. Especially if you are a single member LLC, without an agreement, the LLC will look a lot like a sole proprietorship.

Clarify Verbal Agreements

Co-owned LLCs are required to document both the decision and profit-sharing protocols. There should also be documentation regarding what to do in the event of departing members. If there is no operating agreement, you and your co-owners will not be able to settle issues regarding finances and management that were once only verbal.

Protect Agreement in eyes of the state

Each state has laws that set the basic operating rules for LLCs. Some of these may not be what you want your LLC to work off of, and therefore you will need to have it stated otherwise in your operating agreement.

Information to Include in an Operating Agreement

When drafting your company’s operating agreement, make sure to include this information.

Members ownership: In order to start an LLC, each owner will need to contribute something to fund the business. This might include cash, property, or services. LLC owners are given a percentage in exchange for shares. Despite this, members are able to decide on percentage of ownership in any way that they wish to do so. This should be included in the operating agreement.

Responsibilities: Each member in an LLC should have specific responsibilities which are outlined in the operating agreement.

Profit Distributions: Members are given ownership, but this does not correlate to profits. Profits and losses in an LLC are called "distributive shares."

Procedures of transferring interest: If someone within the LLC dies, retires, or sell’s their interests in the company, what happens next will need to be outlined in the operating agreement.

Voting powers: In some cases a vote is necessary to make decisions, and there are two ways to do this, either each vote is according to the percentage of ownership, or each member gets one vote. Either way this must be laid out in the operating agreement.

Management: The management structure should be laid out dictating who manages and who has what roles.

How to Create an LLC Operating Agreement

The requirement of an operating agreement depends on the state it was formed in. Despite this, not all states require one. Having said that, it is important to draft one to protect all members involved. Be sure to consult with an attorney to assist with the legal document.

When writing an operating agreement for your LLC, you should include the following details:

  • Company basics: Include company name and address, formation date, as well as registered agent details.
  • Member information: Includes member names and contact details, contributions, all rights, and responsibilities, as well as manager/officer details.
  • Accounting procedures: When the fiscal year will end, how records will be kept, and any details about profit distribution.
  • Other processes: Such as voting procedures, what happens if a member quits or is found incompetent, how and when the LLC may be dissolved.

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