Thinking of starting an LLC? Business owners will be sure to benefit from an LLC operating agreement. In many states having an operating agreement is necessary and a requirement when registering an LLC. In this article we will look at operating agreements for LLC in depth, answering some of the most frequently asked questions from new business owners and entrepreneurs.
What is an LLC Operating Agreement?
An operating agreement for an LLC is a legal document setting out the structure, ownership, member duties and operating rules of a Limited Liability Company. The purpose of an operating agreement for an LLC is to regulate and govern the way a company operates internally. The owners of the company determines which rules will form part of the LLC operating agreement.
What are the Benefits of an LLC Operating Agreement?
There are a number of very important benefits when it comes to LLC operating agreements. Below we list the top 5 benefits of having an operating agreement in place for an LLC.
Avoidance of State-Imposed Default Rules
Having an LLC operating agreement in place will prevent the LLC being bound by the default state rules. State laws usually govern LLC rules, but having an operating agreement in place over writes these default state rules.
Clarity of Succession
Stating in the LLCs operating agreement how matters will be handled when a member dies will give guidance to other members of the LLC or family members of the business owner. This also helps with how to continue or wind down the business after the member has passed.
Maintaining Control of the LLC
An operating agreement states how the business is run daily and internally, when an external manager is appointed their tasks, expectations and duties are outlined in the LLC operating agreement. This helps business owners maintain control of the business even though their focus is not on the daily management and running thereof.
Separate Personal and Business Entities
An LLC operating agreement helps the business owners to keep their personal and business assets separately as well as limits their personal liability towards the LLC.
What is included in an LLC Operating Agreement?
There are many variations and of an LLC operating agreement. However some sections are important to include in an operating agreement.
Article I should describe the organisation, the creation of the LLC, the members and the structure of ownership.
Article II should describe management and voting. Set out who will manage the company as well as how decisions will pass. Decisions can be passed through a voting system giving each member a percentage or one vote.
Article III should describe the capital contributions and covers which members have given money to start the LLC. It also describes how money needs to be raised and how future investors have to be treated.
Article IV describes how the companies profits and losses will be shared amongst the members of the LLC.
Article V describes in which circumstances members should or can be changed. It also describes the process of adding and removing members of the LLC.
Article VI described how and when the LLC will be dissolved or winded up in cases of death, divorce or insolvency of the members.
Do I need an LLC Operating Agreement if it is not required in my state?
States like New York, Nebraska, Missouri, Mine, Delaware and California have made operating agreements a legal requirement when registering an LLC. New business should still consider having an LLC operating agreement even though it is not legally required in their states. Operating agreements are fundamental to the businesses credibility and it upholds the limited liability status of the LLC in courts. For LLCs who have multiple members an operating agreement would also be highly recommended to prevent misunderstandings and clearly state the expectations of each member, their roles and their responsibility towards the LLC.
TRUiC provides a great free, online tool for business owners who are in need of setting up an operating agreement for their LLC. operating agreements for LLCs can cost anything form $600 when an attorney writes it.