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What Is An Operating Agreement?

While managing your LLC you have undoubtedly come across the term “operating agreement” and you may have questioned the legal significance.  In short, the LLC operating agreement provides the legal terms that govern your business by establishing the LLC’s purpose, how its run and each member’s rights and responsibilities. Whether you have a single-member LLC or a multi-member LLC, it is strongly recommended as it is where everyone will look for guidance when there is a major business issue.  And with growth and success, you can expect an issue or two at some point.  Therefore, let’s consider the following:

What should be included?

1. Governance.

The operating agreement outlines crucial terms such as the names, contact information and ownership interests of the members.  It specifies how much each member has contributed to the LLC and the corresponding ownership percentage. 

Additionally, it stipulates how the LLC is managed day to day.  Will it be member-managed or manager-managed?  How will decisions be made (majority vote or by ownership interest)?

Clearly noting the owners of the LLC and how the LLC will be run provides a solid, mutual understanding of the business among its members.

2. Rights.

As a member of an LLC, you generally have rights to the profits and you are responsible for any losses.  The LLC operating agreement outlines how much your membership account is credited or debited depending on the revenue earned by the business. 

Also, if at any point you or another member wishes to sell the LLC interest, the agreement will stipulate whether that can be done, and if so, how.  For example, the sale of an ownership interest could require approval of all other members. 

And what happens if a member becomes incapacitated?  The beauty of the LLC operating agreement is that these decisions can be made ahead of time to save time and avoid confusion down the line.

 3. Protection.

Members can also rely on the operating agreement for protection.  In fact, you should not do business without one for this reason alone.  How will business decisions be made if there is a member dispute?  And what about liability, will members be held liable for decisions made on behalf of the LLC, putting their personal assets at stake? 

Take comfort in operating your business with your partners knowing that should you not always agree or if liability is at issue, a plan for solving these challenges is already in place.

How do I obtain an Operating Agreement for my business? 

Operating agreement forms may be found unfiltered online of course but they are usually incomplete, broad templates that will unlikely fit the needs of your LLC specifically not to mention any state required conditions.  So it is advised to consult with a business attorney to draft and prepare an operating agreement that directly addresses the needs of your members and LLC.

Whether you are a new owner or established business owner, consider how an operating agreement can provide assurance and stability to your business operations. 

Feel free to contact this law office for more information about creating an operating agreement your LLC.

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