When starting a business, having a comprehensive and well-executed operating agreement is essential. An operating agreement records important details like the structure of the business (i.e., LLC, Partnership, or Corporation), ownership percentages, management duties and responsibilities and specifics about how events like a sale, dissolution, or dispute resolution will take place. No matter where you’re based in the U.S., it’s crucial to have a legally sound operating agreement. To get the right help in Los Angeles or any county in California, you need the assistance of a business lawyer who is familiar with local regulations.

Simply put, an operating agreement is an internal document that records the ownership and management structure of a business. It can be a partnership, limited liability company (LLC), or corporation. Properly drafted and executed Operating Agreements ensure that all shareholders, members or partners are on the same page about financial and operational policies and procedures. This helps manage expectations, while reducing potential conflict between related parties.

For businesses based in Los Angeles, preparing an operating agreement can be a complex and arduous process. However, done right, businesses of all sizes are afforded greater protection from liabilities and have better opportunities to succeed in their respective markets. So, if you’re in the process of starting a business or transitioning from a partnership to a limited liability company in Los Angeles, it’s important to make sure you have an operating agreement and to seek the assistance of a local attorney that specializes in business law. Let’s review the basics of an operating agreement, what it entails, and how to get started.

What Are the Key Elements of an Operating Agreement?

An operating agreement contains all the essential components that detail the business’s operation. The agreement should clearly clarify every aspect of company operations, including rights, roles and responsibilities of the owners, how to manage equity, and how to go about resolving disputes that may arise.

At a minimum, your operating agreement should include the following:

Company information: A description of the company's purpose, the names of the members who contribute and own the business, and geographic location.

Management structure: Whereas some companies will operate under the member-managed structure (for LLCs and limited partners) or board-managed structure (for corporations), and stipulate which members are appointed to each role.

Equity and contributions: How ownership is distributed amongst the members and how financial capital is contributed to the entity.

Voting: Specify which members of the entity, or if all members need to vote to approve specific decisions or processes.

Profit/ Loss: Clarify when, how, and according to what percentages members of the entity are entitled to profits or losses.

Dissolution and dissolution procedures: How a member may leave the entity and with what consequences, and the process for paying out member equity in the event of the company closing.

Miscellaneous restrictions: Permitted activities, transferability of interests, procedure for amending the operating agreement and any other provisions that the members believe are important.

Getting Started on an Operating Agreement Template

In order to tailor an operating agreement to your business’s specific needs, you may want to work with an experienced Los Angeles business attorney. A qualified attorney can provide guidance and advice on which elements should be included in your operation agreement, and can assist in drafting language that is legally binding and lays out enforceable rights and responsibilities regarding operations.

Once your operating agreement is drafted, the document must be signed by all parties involved. Many businesses require the members to come together and sign the document in a formal setting in order to provide additional guidance and validation. At this time, members may also request clarifications on issues they feel require exploration before signing.

No matter where in the United States your business is based, it’s essential to have an operating agreement drafted to ensure all parties understand their respective roles and responsibilities. In Los Angeles, it's especially important to seek the advice of an attorney that specializes in business law to ensure that the document meets all local regulations. Taking the time to draft a legally sound operating agreement now can provide you with greater protection, while developing a path to enforceable and successful operations.

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