When you choose to form an LLC, there are several tasks you need to complete. However, one of the first should be creating an Operating Agreement.
Operating Agreements are not required in Arizona, but it’s the one document you can have to clarify business management. It’s an agreed upon legal document that outlines your LLCs terms according to the members.
This document not only helps establish rules and regulations for your LLC, but it also protects your business and prevents future misunderstandings.
Here are some more details on Operating Agreements and how to properly create one for your LLC.
What is an Operating Agreement?
An Operating Agreement details your LLCs daily operations, as well as the duties of members and what to do in certain situations. For instance, if a member leaves the business, an Operating Agreement will outline how they could do that and what would happen to their shares.
This legal document is vital to LLCs because it’s what everyone turns to if financial or management issues arise. Although Operating Agreements are not required for Arizona LLCs, and one can be made at any time, it’s best to create one in the beginning to help guide all important business decisions, regulations, and provisions.
Reasons You Should Have an Operating Agreement in Arizona?
There are many reasons you want to have an Operating Agreement from the very beginning of your LLC formation.
Protect business’s limited liability status – If your LLC runs into legal issues, this legally binding document can help protect your business.
Clarify Verbal Agreements – An Operating Agreement is an agreed upon document by all members. Anything that is considered a verbal agreement can be written down and referred back to if needed.
Protect Agreement in eyes of the state – If you choose to not have an Operating Agreement for your LLC, your business is governed by the rules of the state.
What Information Should You Include in an Operating Agreement?
There are several topics you can include in an Operating Agreement. However, most Operating Agreements contain specific sections that include the following:
You want your Operating Agreement to contain all general information about the business. This includes the name of your LLC, the Articles of Organization that specifically lays out how your business plans to run, the physical address of the LLC, and the name and address of your registered agent.
With an LLC business structure, shares are not determined by ownership. Members are allowed to have any vested interest in the company. The management of the LLC is clearly defined in an Operating Agreement and states the responsibilities and finances in detail.
LLCs can have as few or many members as necessary. Therefore, there needed to be common ground on how and when new members can be admitted. There also needs to be regulations on how to remove members if necessary, and what the process is if a member chooses to leave.
Meetings and Voting
When meetings will be held, how they will be held, and where they will be held needs to be clearly defined. It should also be stated who is required at the meetings and how the voting will be held to make decisions.
In an LLC structure, responsibilities are given to all members. Whether it’s operational responsibilities or daily responsibilities, it needs to clearly indicate who has which duties, along with their title and address.
Which members contribute and how much? A specific breakdown should be included of the ownership percentage of each member.
Outline how taxes are allocated and distributed. How should each member report their profit shares on their taxes?
Members of an LLC are not paid out equally, nor is there a rule stating how they are paid out. To help resolve conflict, state how much each member is paid out and how (i.e. cash or services).
Procedures of Transferring Interest
All members should be in agreement regarding the transfer of ownership. The Operating Agreement should define what happens if a member leaves the company or passes away.
What happens if the LLC fails? Whether it’s voluntary or involuntary, there needs to be regulations on how to handle dissolution from each member.
How to Create an LLC Operating Agreement
After reading the information to include in an Operating Agreement, creating one may seem like a daunting task. And while the process can become tedious, it’s best to work with a business lawyer to help create one that is tailored to your specific business.
Begin creating your LLC Operating Agreement by collecting all necessary information, such as the names, addresses, and titles of each member. From there, you will determine more specific information about the members and their ownership. For example, what percentage is owned by each member.
Protecting your business is one advantage of an Operating Agreement. Therefore, it’s important to designate specific rights and responsibilities to each member. This includes their voting rights, responsibilities, pay, and profit sharing.
Once these steps are complete, it’s time to think ahead. What happens if members leave? What are your dissolution terms?
When working with a business lawyer, this process is typically smooth and simple. You, along with the other members, will meet with the attorney to discuss this legally binding document. The lawyer will then help you customize an Operating Agreement to a document that best fits your needs.