If you are seeking a business structure with personal protection but less formality, forming an LLC (Limited Liability Company) is a great option. Regardless of your business structure, certain paperwork, like an operating agreement, is essential. Here are the basics every LLC owner should know about operating agreements:
An operating agreement is a key document used by LLCs to outline the business' financial and functional decisions, including rules, regulations, and provisions. This document governs the internal operations of the business in a way that suits the specific needs of the business owners. Once signed by the members of the LLC, it acts as an official contract binding them to its terms.
Operating agreements provide members protection from personal liability to the LLC. Without this formality, your LLC can resemble a sole proprietorship or partnership, jeopardizing your personal liability.
Even if members have agreed orally to certain terms, misunderstandings or miscommunications can occur. It's best to have operational conditions and other business arrangements in writing for reference in the event of any conflict.
State default rules govern LLCs without an official operating agreement. These default rules are general and not advisable to rely on for managing your agreement. An operating agreement ensures your specific terms are honored over state defaults.
Tip: Consult with an attorney and accountant to assist with the financial and legal matters of your agreement.
Operating agreements are generally between five and twenty pages long and cover the functionality of internal affairs, including but not limited to:
The requirement of an operating agreement depends on the state in which the LLC was formed. Many states do not require operating agreements. This information can generally be found on your Secretary of State website.
Tip: It is unwise to operate without an operating agreement, even though most states do not require one. Regardless of your state's law, consider the benefits before opting out of this provision.
Operating agreements should be kept with the core records of your business. They are not required to be filed, nor will they be accepted by your state.
Tip: Operating agreements should be kept confidential.
To write a simple operating agreement, start with a template or seek help from an attorney. Make sure to include key details such as ownership percentages, management structure, how profits and losses will be distributed, and basic operational rules.
An LLC's operating agreement typically includes details like ownership percentages, voting rights, roles and duties of members and managers, how profits and losses are shared, meeting procedures, and rules for buying or selling ownership interests.
An operating agreement is very important. It protects the LLC's limited liability status, helps avoid misunderstandings by putting agreements in writing, and ensures the business follows state-specific rules, even if it's not legally required.
Yes, once all members sign the operating agreement, it becomes a legally binding contract. This means all members must follow the rules and guidelines set out in the agreement for managing the LLC.