Select Page

Operating Agreement in LLC: Why You Need One

For those who are starting a limited liability company (LLC), one of the most important documents that they need to create is an operating agreement. An operating agreement is a legal document that defines the internal workings of an LLC, including the management structure, ownership rights, profit distribution, and more. In this article, we will discuss why you need an operating agreement and what it should contain.

Why You Need an Operating Agreement

First and foremost, having an operating agreement is not a legal requirement in most states, but it is highly recommended. This document will help ensure that the LLC is operating smoothly, and the members are clear on their roles and responsibilities. An operating agreement can also prevent disputes among members by providing a clear understanding of the company`s policies and procedures. Moreover, it can help protect the LLC`s limited liability status, which is one of the primary reasons why business owners choose to form an LLC in the first place.

What an Operating Agreement Should Contain

The contents of an operating agreement will vary depending on the needs of the LLC and the state laws where it is formed. However, here are some of the most important provisions that should be included:

1. LLC Management Structure: This section should define how the LLC will be managed. An LLC can be either member-managed or manager-managed. In a member-managed LLC, all members have an equal say in the company`s management. In a manager-managed LLC, the members appoint one or more managers to run the company`s day-to-day operations. This section should also specify the powers and duties of the managers or members.

2. Ownership Rights: This section should outline the ownership structure of the LLC. It should include the number of members, the percentage of ownership for each member, and how new members can be added to or removed from the LLC. It should also describe the process for transferring ownership interests.

3. Profit Distribution: This section should specify how the LLC`s profits will be distributed among the members. It should include the percentage of profits that each member is entitled to, how profits will be distributed, and when distributions will be made.

4. Voting Rights: This section should define the voting rights of the members. It should specify the matters that require a vote, the percentage of votes required to pass a resolution, and the process for voting.

5. Dissolution: This section should explain the process for dissolving the LLC. It should include the circumstances under which the LLC will be dissolved, who has the authority to initiate the dissolution, and the steps that will be taken to wind up the LLC`s affairs.

Conclusion

An operating agreement is an essential document for any LLC, whether you are starting a new business or already running one. It provides a clear framework for the company`s operations and can prevent disputes among members. If you need help creating an operating agreement for your LLC, it is highly recommended that you consult with an experienced attorney.