Let’s talk about LLC’s for a moment folks. It’s a pretty lengthy, but simple process in the beginning stages, right? You register a company name for your LLC, select your LLC members, and choose your management structure. Pretty standard, but what comes next?
Well, now would be the time you set up your LLC Operating Agreement.
What is an LLC Operating Agreement?
An LLC Operating Agreement is a written document between members of a Limited Liability Company (“LLC”).
Many states do not require Operating Agreements, but it is highly encouraged, as an LLC Agreement further distinguishes the company as an LLC rather than a sole proprietorship or partnership.
Additionally, an LLC Operating Agreement prevents disputes by defining each owner’s responsibilities and clarifying how decisions and profits are to be distributed internally.
A simple LLC Operating Agreement will identify the following basic elements:
- Binding Authority - which individuals have the authority to sign contracts for the company.
- Meeting Frequency
- Members - the names of each person who owns part of the company, and how new members may join or old members leave — done to make internal transitions smoother.
- Term - how long the company will exist or when it should be dissolved or continued.
- Transferring Interest policies
- Voting procedures and guidelines
Do I really need one?
No, but you should get one! Individuals searching for more control over how their organizations operate on an everyday premise and managed for a long haul, ought to put resources into an LLC Operating Agreement.
A composed LLC Agreement ensures an organization's restricted risk status by demonstrating that the LLC is a separate lawful entity. Without composed documentation of an Operating Agreement, an organization may have all the earmarks of being sole ownership or association for charge and legitimate purposes.
Banks, moneylenders, investors, and some experts will regularly request an LLC Operating Agreement prior to permitting an organization to start a business checking account, secure financing, get venture cash, or acquire appropriate lawful and expense help.
Furthermore, even though your state may not require an LLC Operating Agreement, a written document can help clarify the company’s internal management procedures and operations. Your state’s default LLC rules will apply if you do not have an Operating Agreement. For example, if you do not detail what happens when a member of the company leaves or passes away, the state may automatically dissolve your limited liability company based on its laws.
Another example of where an LLC Operating Agreement would be necessary is the percentage of ownership. LLC members own a percentage of the company, not shares of a corporation. However, state default rules often assume that each owner has an equal share of the company, even though they may have contributed different amounts of money, property, or time.
If you want something different than your state’s de facto laws, an LLC Operating Agreement allows you to retain control and flexibility on how the company should operate.