Starting an LLC can be a great way to structure and protect your business. But what many people don’t know is that it’s important to create an Operating Agreement for your LLC.
An Operating Agreement sets forth the rights of each member and dictates how the company should operate day-to-day. It’s like a contract between the members of the LLC, so it’s important to get it right!
Knowing what goes into creating an Operating Agreement will help make sure that your LLC is running smoothly and efficiently. Let’s take a look at the basics of Operating Agreements for an LLC.
Related: Best LLC Formation Services
What is an LLC Operating Agreement?
An LLC operating agreement is a legal document that outlines the operations of an LLC. This document includes important information such as the members of the LLC, their percentage ownership in the company, and the responsibilities of each member.
An LLC operating agreement also spells out how profits and losses are divided among the members, and how decisions are made within the company. Having an LLC operating agreement is important for protecting the interests of all members of the LLC.
Why is an LLC Operating Agreement Important?
An LLC operating agreement is important because it helps to protect the interests of all members of the LLC. This document outlines how the company is run, and what each member’s responsibilities are.
By having an LLC operating agreement in place, members know exactly what to expect from one another, and can avoid any potential conflicts down the road.
Additionally, an operating agreement can help to ensure that the LLC is in compliance with state and federal regulations. All members of the LLC should consider having a formal operating agreement put into place before starting any business activities.
Governing Laws of an LLC Operating Agreement
The governing laws of an LLC operating agreement are determined by the state in which it is formed. Each state has its own set of rules and regulations, so it is important to read up on these before drafting your operating agreement.
Additionally, most states require certain information to be included in the agreement such as the members of the LLC, their percentage ownership in the company, and how profits and losses will be divided among them. By understanding your state’s laws regarding LLC operating agreements, you can ensure that yours is compliant with all local regulations.
Creating an Effective LLC Operating Agreement
Creating an effective LLC operating agreement requires careful consideration of the state’s laws, as well as thorough communication between all members of the LLC. All members should have their own copy of the document and be familiar with its contents.
It is also important for all members to discuss and agree upon the provisions included in the agreement, such as how profits and losses will be divided among them.
Additionally, it is important to get the agreement in writing and signed by all parties involved so that any disputes can be avoided down the road. By following these steps, you can create a comprehensive LLC operating agreement that works for all members of the LLC.
What’s included in an LLC Operating Agreement
- Ownership percentage – In an LLC Operating Agreement, it is important to spell out the ownership percentage of each member. This will help to ensure that everyone is aware of their stake in the company and what they are responsible for. It is also important to note that the ownership percentage of each member may change over time, depending on the circumstances. For example, if a member leaves the company, their ownership percentage would be transferred to the remaining members. By specifying the ownership percentage of each member in the LLC Operating Agreement, you can avoid any disputes down the road about who owns what.
- Management of the LLC – The management of the LLC is typically vested in the members of the company. This means that the members are responsible for making decisions about the company and its operations. However, it is important to note that an LLC operating agreement can specify a different management structure if desired. For example, the members could appoint a manager to handle all day-to-day operations of the company. This would allow the members to focus on other aspects of the business, while leaving the day-to-day tasks to someone else. By outlining the management structure of the LLC in the operating agreement, you can ensure that everyone is clear on their roles and responsibilities.
- Contributions and Distributions – In an LLC, members may contribute money, property, or services to the company. This contribution is then used to start or maintain the business. It is important to note that contributions are not the same as distributions. A distribution is when money or property is paid out from the company to its members. By specifying how and when contributions and distributions will take place in the LLC Operating Agreement, you can avoid any potential disputes between members. This section should outline the following: How much each member has contributed to the LLC; What property or services have been contributed by each member; When and how distributions will be made to members
- General Provisions – The general provisions section discuss how your LLC will be managed. It will cover things like holding meetings and keeping minutes, how decisions will be made, and documentation of those decisions.
Is an LLC Operating Agreement required?
An LLC operating agreement is not required by law, but it is highly recommended that all members of an LLC have one in place. This document helps to outline the operations of the company and spells out the responsibilities of each member.
By having an LLC operating agreement in place, members can avoid any potential conflicts down the road. Additionally, this agreement can help to ensure that the LLC is in compliance with state and federal regulations.
Do I need to file it with the state?
An LLC operating agreement does not need to be filed with the state, but it is important to keep a copy of it on file.
Single Member LLC Operating Agreements
An LLC operating agreement is not required by law for a single member LLC, but it is still recommended that you have one in place. Even though it may seem there is little reason for one if you’re not spelling out the agreement between multiple members, there are other reasons to create an operating agreement:
- Secure liability protection – The main reason you’re starting this LLC is to protect your personal assets. In order to do that, you need to operate the LLC as it’s own entity, and ensure you do not commingal it with personal affairs. Creating an operating agreement helps to solidify this in the eyes of the state and in any legal proceedings.
- Banks, Lendors, and Investors – Regardless of the number of members in your LLC, financial institutions may want to see an operating agreement. This can help to solidify your ownership, and also show them you have formal processes for running the LLC.
- Default state rules – If you don’t have an operating agreement, the state’s rules will automatically apply in the event of a dispute or other legal situation.
Free Operating Agreement templates
Since operating agreements aren’t required to be filed by the state, there’s not much money for companies to make off them. And that is going to work in your advantage since most companies that help form LLC’s will give you a free operating agreement along with your package.
Here are a couple online services that provide an operating agreement:
The bottom line on Operating Agreements for an LLC
In summary, an LLC operating agreement is a legal document that outlines how an LLC will be conducted and how profits and losses are divided among its members. It is important to create one in order to protect the interests of all members involved.
To create an effective LLC operating agreement, it is important to understand the governing laws of the state in which it is formed and to discuss and agree upon its provisions with all parties involved. By following these steps, you can ensure that your LLC operates smoothly and efficiently.