How to Create an Operating Agreement for LLC: Everything to Know
You need to know how to create an operating agreement for LLC if you're planning on forming a business and structuring it as an LLC.3 min read
What is a Limited Liability Company (LLC)?
You need to know how to create an operating agreement for LLC if you're planning on forming a business and structuring it as an LLC. This business structure is formed by filing the required forms with your secretary of state. As the name indicates, a limited liability company offers limited liability to its owners, called members. Limited liability means the members aren't held personally responsible for company obligations or debts.
What is an LLC Operating Agreement?
An LLC's operating agreement is a legal document outlining the responsibilities and rights of all members of the LLC. It also includes details about:
- Plans to manage the LLC
- Structure of the business
- How members will make decisions
- How new members can be admitted
- When it will hold meetings
An operating agreement establishes the plan and rules for an LLC. Members can choose the structure for managing the business and determine who is responsible for what tasks within the business operation, as well as make other decisions on critical issues. An LLC operating agreement also outlines the company's guidelines in the same way that articles of incorporation outline the guidelines for a corporation.
Certain factors can impact the details of an operation agreement, including:
- Profit sharing
- Tax election and considerations
- Number of members
- Management structure
If an LLC has two or more members, the operating contract serves as a binding legal contract among all members.
Facts About LLC Operating Agreement
After you have created an LLC, the next step is defining the terms for operation in your operating agreement. This document will also help protect legal responsibilities and rights. Once you have the operating agreement in place, with an outline of how the business will be managed and run, you can start handling business tasks and building a successful company.
An LLC agreement applies if:
- You have formed an LLC but don't have an agreement in place
- You are planning to form a new LLC and wish to define the terms of the business.
You might also hear an LLC operating agreement referred to as:
- LLC setup agreement
- LLC bylaws
- Limited liability company operating agreement
- LLC operations agreement
- LLC agreement
- Operating agreement LLC
- Operating agreement for LLC
- LLC partnership agreement
- Operating agreement
Who is Considered a Member of an LLC?
Any individual or business that is at least a partial owner of an LLC is considered to be a member. They must provide some type of capital contribution, such as property, services, and/or money, in exchange to own a percentage of the business.
Does an LLC Have Shares of Stock Like a Corporation?
LLCs differ from corporations in several ways. One of these ways is the distribution of shares of stock; an LLC doesn't provide shares to its members. Instead, members receive a percentage of business ownership, based on each member's contribution. No matter how many members are involved in an LLC, the total of the ownership percentages must equal 100 percent,
General partnerships and LLCs also have some similarities, but they also have some differences. For example, in a partnership, the partners are personally responsible for business obligations and debts, while an LLC limits the personal liability of members. Amendments are allowed to an LLC operating agreement, as long as all members agree on the amendment and sign it.
How to Draft an LLC Agreement
Choosing to form a small business and structure it as an LLC is a smart decision. The next steps after forming an LLC can vary, depending on the state in which your LLC will operate. However, on a federal level, an LLC has more flexibility than a corporation. Strict rules apply to nonprofit organizations, S-corps, and C-corps, mainly because of the concerns related to stock distribution. The government maintains tighter control over corporations because of regulations around stock and taxation.
Drafting and implementing an operating agreement for your LLC is the easiest way to figure out how you want to run the business. Start by defining certain aspects of business operation to simplify the day-to-day going forward. The first part of the operating agreement should define the purpose of the business. This could be selling bagels, distributing automotive parts, or consulting with major companies. You should also outline some basics about the company, including the office address and phone number.
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