Having a law firm LLC operating agreement is essential when running a company. Here are some rules to follow when forming one.

Overview of an Operating Agreement

Some parts of forming an LLC can be fun: figuring out what the name and logo will be, defining what products and services to offer, and figuring out how to expand the business. However, writing an operating agreement is not always easy.

The operating agreement, also known as a partnership agreement for LLCs with multiple members, is a legal document that helps define every member's responsibilities and rights. It also states the provisions necessary for operating the company, including daily operations and what to do if the company dissolves or a member dies.

Creating and updating an operating agreement that details the long-term objectives of the company is necessary. It should also describe how to handle the following changes:

  • Changing compensation
  • Adjusting equity
  • Providing buyout and retirement provisions
  • Adding new partners
  • Terminating non-performing partners

A document that's legally binding will also help support any strategic initiatives. If the transition plan has a requirement of new partners admitted, it's necessary to have a provision be in charge of the transfer. The most crucial parts of the transition plan will be bound by this written agreement and will make the firm more confident to make any changes that may be necessary. Much of the content in partnership and operating agreements are standard.

LLC Operating Agreement Basics

Most law firms provide an operating agreement that was either created from scratch or is based on a standard form. There are a few items to define in order to run the business the way that's preferred. The purpose of the limited liability company needs to be noted, whether that's selling bagels, consulting for large companies, or selling car parts. Basic information also needs to be filled out, such as what the phone number for the LLC is and where the business is located.

The operating agreement lets the company define every member's role and what their daily duties are. One benefit an LLC has is the roles can be defined as the business sees fit. As an example, one manager can do 50 percent of the work but only needs to contribute 10 percent of the seed money. This stipulation can be stated in the operating agreement, and the shares that each member owns can be determined.

It's important to have a designated person be in charge of the accounting for the LLC operating agreement. This person will be in charge of making sure all profits are equitably distributed. The manager will also be in charge of writing checks and decides when the fiscal year starts and ends. An LLC may want to look deeply into their books every few months, while others may wait years--it's up to the company.

Basic Provisions: Ownership Defined

Many operating agreements discuss ownership related to capital account balances. This may be acceptable in certain circumstances, but defining ownership as a definition of any capital accounts should not happen. As an example, say person A and person B form an LLC, and each has 50 percent interest and contributes $10,000. Then, an asset is bought by the LLC for $20,000.

If little to no income is produced and few expenses have been generated, the asset appreciates up to $100,000 after five years. Person A and person B then decide to admit person C to have a third of the interest and develop the land. Person A and person B will also have a one-third interest. This means if person C contributes $10,000 to the LLC, they suddenly have a one-third interest in an asset worth $100,000.

This problem can be solved if the agreement clearly defines percentage ownership for each person in the limited liability company. If one partner is the workhorse and another one is the money partner, this should be clearly defined in the agreement so everyone knows what they're getting into. It's important that members talk about how decisions will be made. For example, how many members will constitute a quorum is a topic that needs to discussed thoroughly.

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