Forming a limited liability company (LLC) is a great way to protect the interests and assets of members and to establish the legal framework for the company’s operations. A key part of the LLC formation process is the drafting of a comprehensive and secure operating agreement, and this is usually where the assistance of an experienced business lawyer can really help. If you’re based in Chicago and looking for an attorney who understands the nuances of local regulations, UpCounsel has a network of experienced and licensed business lawyers to help you.

An operating agreement is an important legal document which sets out how the LLC will be governed and how the members’ rights and responsibilities will be managed. The operating agreement also defines terms relating to ownership, voting authority, management structure and more. It outlines the rules that each member of the LLC is obligated to follow, and it handles things such as custodianship of documents, selection of representatives, and dispute resolution.

Before drafting an operating agreement, there are five key things to consider.

1. The Structure of the LLC

A crucial element to address in your operating agreement is the structure of the LLC. The structure determines whether the LLC will be a single-member LLC (SMLLC) or a multiple-member LLC (MMLLC). It also outlines how members will be added or removed from the LLC, the percentage of ownership each member has, and which members will have oversight of decisions made by the LLC.

2. Capital Contributions

Capital contributions refer to the assets each member contributes to the LLC. These can include financial contributions or property assets, and the operating agreement should clearly specify the amount and type of contributions each member makes. If there are changes in capital contributions over time, these should be documented in the operating agreement too.

3. Distribution of Profits and Losses

The operating agreement should also document how profits and losses will be distributed to individual members. It should state how these distributions will be determined, including whether they will be proportional to percentage of ownership or by agreement of all members. As such, it’s important to set out these terms clearly so that any ambiguities can be addressed.

4. Management of the LLC

Creating an effective management system is essential for the smooth running of an LLC. The operating agreement should define the organizational design of the LLC, including which members are responsible for making decisions about the LLC’s operations. It should also document how these members can be changed or replaced over time, and establish methods of accountability for the elected members.

5. Rules of Dissolution

The operating agreement should also include specific rules about how the LLC will be dissolved. These rules should include details about the circumstances in which an LLC can be dissolved, such as when all of the members agree to terminate the business or if one of the members cannot be found. It should also define the process of liquidating assets, collecting debts, and distributing the remaining assets to the members.

Drafting an operating agreement should be a priority for any new LLC. But to ensure it’s comprehensive and secure, it's important to seek the insight of an experienced business lawyer. An attorney who is familiar with the regulations of the State of Illinois and the city of Chicago can guide you through the process, helping you create an operating agreement that covers all the key elements and safeguards the interests of each member.

If you need legal advice or help when drafting an operating agreement, the UpCounsel network of experienced lawyers can provide high-quality, cost-effective legal services. Their attorneys have an average of 14 years of experience, and each lawyer is rated and reviewed by current and past clients, so you can be sure you’re getting the best services for your business.

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