Two documents you should know about when forming an LLC (Limited Liability Company) are the Articles of Organization and the Operating Agreement.
LLCs are often easy to form and are known to provide business owners flexibility. However, that flexibility can often lead to a myriad of issues if you don’t have an Articles of Organization and Operating agreement in place.
Unlike the Articles of Organization, an Operating Agreement is not required. However, without one, you’re risking your limited liability status, member arguments, and a failing business.
How do you make an Operating Agreement and what should you include in one? We have the answers here.
What is an Operating Agreement?
Most states do not require Operating Agreements for LLCs. But if you want to ensure that all members of your LLC know and understand their roles and responsibilities in the business, it’s best to create an Operating Agreement.
An Operating Agreement is a legal document outlining how decisions are made within the LLC. It also addresses business financials, members' roles, regulations, and rules for the business. The purpose of an Operating Agreement is to ensure the business is being properly run to fulfill specific wishes of the business owner(s).
Why Do You Need an Operating Agreement?
You can form an LLC without an Operating Agreement, however, having this document can be essential to your business. An Operating Agreement can be used in place of state laws – meaning you can utilize the flexibility of the LLC title and make your own rules.
Operating Agreements help resolve disputes, clarify verbal agreements and regulations, and protect the LLCs legally. In a nutshell, it can secure your liability protection. Additionally, banks and investors may require an Operating Agreement before approving loans for your LLC.
Information to Include in an Operating Agreement
Most LLC Operating Agreements are short and to the point. They can address a range of issues, but they typically include this information:
Member’s ownership – When you form an LLC, you choose how you want your business set up. For instance, member-managed or manager-managed.
Responsibilities - Regardless of which structure you choose, there needs to be clarity on the authority and responsibilities each member has. You should also state how you plan to make decisions and which members vote.
Profit Distributions – When LLCs are formed, the owner often assigns members’ percent of ownership according to the percentage of the total funds they invested into the business. However, there are several ways to distribute profits, and your Operating Agreement needs to specify the percent of ownership to make it clear.
Procedures of transferring interest – The Operating agreement should address in detail what steps to take if a member wants to transfer their interest to another member. This usually happens if a member plans to leave the LLC.
How to add new members – If a member wants to add others, a set structure needs to be added for onboarding.
Closing of Business – You should also address what steps need to be taken when dissolving the LLC and how the assets should be divided, and debts paid off.
How to create an LLC Operating Agreement
An Operating Agreement puts into written format how an LLC will function. It’s an essential document that helps establish a stable structure for your business. The details listed in an LLC Operating Agreement vary depending on several elements. There is basic information to include, but if your LLC's Operating Agreement goes beyond that, it’s best to consult with an experienced business attorney. Here’s a list of the basic information often included in Operating Agreements:
Name of LLC
This ensures that the correct business is mentioned in the agreement. It should be clearly stated in the event a case goes to court.
Address of LLC
Whether it’s the place of business, or a personal business address, the address for your LLC should be clearly stated.
Name and address of registered agent
It’s required by every start that an LLC have a registered agent. There are no rules as to who the registered agent can be, and regardless of who you choose, they must have a physical address. Their legal name and address should be listed in the Operating Agreement.
Information about the articles of organization
To make connections between the articles of organization and the LLC, information should be included in the operating agreement.
Duration of the LLC
LLCs can have perpetual existence, or they can last for a conditional period of time. This information should be included in the operating agreement.
Whether the purpose of your business is to sell products, provide services, or act as a holding company, it needs to be included in the operating agreement.
How a Lawyer Can Help When Writing an Operating Agreement
While this task can seem overwhelming, writing an Operating Agreement is often simple. With the help of a business lawyer, the task will only take a short amount of time.
It’s essential to have all the details and information included because it will help better protect your limited liability status. Creating an Operating agreement helps protect members in multiple ways and it helps businesses bypass state laws governing LLCs.
To reduce the risk of your LLC failing, it’s best to work with a business attorney when writing your Operating Agreement.