LLC Contracts: Everything You Need to Know
LLC contracts usually come in multiple forms, such as an operating agreement, and contracts your LLC enters into with other parties.3 min read
- An LLC safeguards the personal assets of all members
- LLCs offer pass-through taxation, where profits and losses flow from the LLC to members to file on their personal tax returns
- An LLC structure gives your business more credibility in the eyes of partners, vendors, and customers
- LLCs are more flexible than other entities, such as corporations
When you sign a contract for the business, it is imperative that the agreement shows that the business entered the agreement and not you on an individual level. Overall, an LLC is a separate entity from the individual. An LLC is a legal entity, and though it can be entered into an agreement, it should do so through a personal acting in a managerial role.
- Review the Contract: The LLC must be involved in the contract and include the full name and designator, such as “Limited Liability Company” or “LLC.” For instance, if your business name is Smith’s Landscaping Service, LLC,” the business must use that name as party to the contract, and not an owner’s name.
- Signature Verification: Such a line includes the official title with an LLC. For instance, if you are a managing member, ensure that the designation is included in the signature line.
- Name Inclusion: You must include the LLC name under the legal title with the entity name on the signature line.
An operating agreement is a contract that outlines the basic management structure of your LLC. An operating agreement is similar to corporate bylaws of a corporation. An operating agreement also details how a business should run and emergency provisions regarding special circumstances. For instance, the LLC should outline the process if a member dies, leaves, or gets a divorce.
An operating agreement should outline the following:
- Role of owners and members of the LLC
- A record of the rights and obligations of all members
- An outline on how the LLC operates, ranging from financial administration to membership rules
Operating agreements prove to be invaluable because:
- They formalize your status as a distinct entity, which is especially vital for sole-member LLCs
- They allow you to know how the business will operate, instead of being subject to the default rules of your state
- They help to avoid confusion on how profits will be distributed or how vital decisions will be made
Operating Agreement Essentials
An operating agreement is not mandatory, but you should have one in place to govern your LLC with efficiency. Operating agreements tend to be longer and include detailed information on the LLC. With that, each operating agreement is different, and members are free to tailor an agreement how they see fit.
However, your state may require specific language to be included in the agreement, and state law may differ regarding the language required.
You should be aware of the following certain contract sections:
- Defines Major Terms: Such terms should be capitalized in the document
- Abbreviations: The abbreviations used in the document for the ease of reading. For instance, the word company shall refer to the full company name.
In addition, the information should include company basics, such as created date, business address, registered agent, contract duration, and the business purpose. Moreover, membership information should include contact information, membership contractions, and what would happen if a member dies or quits. Also, voting procedures and membership duties should be included.
The contract must also state that the obligations, debts, and other liabilities are relegated to the business alone and not the members. The agreement must also state the purpose for which the LLC was created. Membership duties must also be noted, including whether new members will be admitted.
When the fiscal year ends, you should keep records and mention how such records are maintained, especially for matters pertaining to distribution. Further, you should include provisions on dismissals and power limitations. Last, you should include a board membership structure that notes managerial duties necessary for meetings, including compensation.
To find out more on LLC contracts, submit your legal inquiry to our UpCounsel marketplace. UpCounsel’s attorneys will give you deep insight into crafting a sound operating agreement, including any contracts with individuals or businesses. Also, they will help you choose the right business entity that suits your business goals.