LLC Operating Agreement:- You may want to ask, what is an LLC operating agreement? An LLC operating agreement is the legal document that governs your limited liability company. An operating agreement shows who owns and manages the LLC, how profits are managed, as well as how any problems the LLC may have now or in the future will be resolved. Now note that articles of organization do not govern your LLC. An LLC operating agreement is not needed in any state in the US even though it is important.
What is An LLC Operating Agreement – What is an Operating Agreement?
An LLC Operating Agreement stands as a legal document that outlines the ownership as well as member duties of your Limited Liability Company. With this agreement, you are allowed to get out of the financial and working relations among business owners (“members”) and between members and managers.
Now the contents of an LLC operating agreement vary based on the number of owners in your LLC.
In case you are the sole owner of your business, then you would require an operating agreement for a single-member LLC. If on the other hand, your business has multiple owners, then you will need one for a multi-member LLC.
Basically an operating agreement should cover the following six topics:
Organization of your LLC: This implies who are the LLC members, and what are their shares of ownership?
Management: This covers who is responsible for running the business? How will major business decisions be made?.
Capital Contributions: How are the operations of the LLC funded.
Distributions: How will the profits of the LLC be distributed amongst the owners?.
Membership Changes: Here, you should be able to project into the future if the LLC will be able to add new members later on? What is the process for removing an existing LLC member?.
Dissolution: If and when the owners decide to dissolve the LLC, how is it going to happen?.
Does My Business Need An Operating Agreement?
Operating agreement has become a crucial document for any business owing to the significant protections it offers. Howbeit, most states do not need businesses to have an operating agreement, and no state requires your operating agreement to be on file in their records.
Whether an operating agreement is required in your state or not, it is advisable that you create one because of the following reasons:
- If you happen to be the sole owner of an LLC (Single Member LLC). This is because creating an operating agreement gives credibility to your LLC. This helps to ensure that courts uphold the limited liability status of your LLC by strengthening your corporate veil.
- In case you have business partners (Multi-Member LLC). Why this is important, is because an operating agreement helps prevent misunderstandings by setting clear expectations about partner roles and responsibilities. Itis never advisable to go into business without an operating agreement, because when you have partners or other members involved, the operating agreement document becomes an invaluable asset to your future success.
Components of an LLC Operating Agreement Template
Regardless of the type of LLC operating agreement you need to use, you will need certain information:
- Information about the LLC: Here you have the name of the LLC, a description of the services offered, singing information for the LLC, and the office address.
- Information for each member: For every member, their names and address, must be listed, their membership class, the capital they contributed to the business, their ownership percentage as well as how much of the profits and losses they get to receive.
Why Operating Agreement?
There are three main reasons why operating agreements are enacted:
To protect your business(es) limited liability status
If you do not have an operating agreement in place, it is possible that you may end up incurring personal liability for your business activities. Now businesses who do not have this document look like sole proprieties or partnerships and can totally negate the effect of limited liability protection.
To solidify member agreements
Agreements between members of an LLC are unenforceable if they are not put down in writing. Verbal agreements on the other hand are common in new business ventures, even though miscommunications or disagreements can jeopardize the viability of a business if the guidelines are not written down to help solve these issues.
To prevent the state for managing your agreements
In a situation where the state needs to step in to manage your business, they will follow the guidelines outlined in your operating agreement. Thus failure to have this document will force the state to use their default rules in governing how this agreement is handled.
After Creating Your Operating Agreement
After you are through with your operating agreement, you don’t necessarily need to fill it with your state. You can keep it for your records and hand out copies to the members of your LLC.
In the event of adding or losing a member, it is ideal to review and consider updating the operating agreement. Now, depending on how the document was written, it may need some or all of the members to approve an amendment to the document.