Bylaws for an LLC are outlined in the operating agreement. This document, though not required by law, outlines what each member of the company is responsible for and how you'll proceed with certain issues, such as changing owners or dissolving the company. Learning about bylaws and creating an operating agreement for your LLC can safeguard the enterprise for years to come.

Overview: LLC Operating Agreement

Well-written bylaws are key to navigating formal business matters without conflict. For LLCs, these bylaws are known as an operating agreement.

Difference Between Articles of Organization and Operating Agreement

Your LLC's articles of organization are required when you apply for your LLC, but this document only includes basic information, such as your business address and the members' names. The operating agreement is the document that outlines how your business must manage certain aspects of the business and who is responsible for what parts of the enterprise.

The operating agreement governs your LLC — not the articles of organization. This document is incredibly important, but it isn't federally required that your LLC create an operating agreement.

The agreement includes details such as:

  • Who owns the LLC
  • Who manages the LLC
  • How profits are distributed
  • How many members must agree to an amendment to change the articles of origination
  • How to proceed with any problems or changes affecting the LLC

You can create an operating agreement whether you have a single member or multimember LLC, though what you'll need to include in the contract will vary based on how your business is structured.

Do You Have to Draft an Operating Agreement for Your LLC?

Only a few states require that you create an operating an agreement for your LLC. In areas where this document isn't required, you won't lose LLC liability protections or be unable to start this type of business if you don't draft an operating agreement.

However, even states where this document isn't required will recommend that you create one, have all members sign it, and get it notarized. Moreover, creating an operating agreement when you form your LLC can help you with lenders, banks, potential partners and investors, and attorneys and accountants. Working with these third parties will be much easier if you can provide them with a copy of your operating agreement.

What Do You Need to Include in Your LLC?

Most LLCs include information such as the organization's structure, each member's individual responsibilities, a list of committees, who's on the board of directors, and how directors' and shareholders' meetings are structured. Note that LLCs aren't required to hold formal meetings or to create a board of directors. This is just an option for this type of business structure.

If you live in a state that requires an operating agreement for your LLC, you will likely need to include the following information about each member:

  • Their percentage of ownership
  • Their rights and responsibilities
  • Their voting power
  • Their fiduciary duties

The operating agreement should also include details about how profits and losses are distributed and how the business is to be managed. More specific information about what you need to include in your LLC is highlighted below.

  • Contact Information and Principals: Provide the company's name and address as well as the names of all members. You may also provide the address of your registered agent if they're located at a different address than your LLC.
  • The LLC's Term and Purpose: Record the purpose for your LLC (i.e., what product or service you provide and to whom) and whether you want the business to automatically dissolve at a certain date, dissolve after meeting certain conditions, or continue to run indefinitely.
  • The Rights and Responsibilities of Members: In this section, you can assign roles to individual members and state whether you will hire workers to handle certain responsibilities (such as training new hires). You can also include how often and where the members will meet to go over the LLC's progress and standing.
  • The Distribution of Profits and Losses: The operating agreement should explain how losses and profits above the growth target will be shared among members. If you want to reinvest company cash flow beyond a certain profit margin, that information should be included in the operating agreement. This will help avoid confusion about who is entitled to the company's profits and what percentage each member is owed.

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