1. Benefits of the LLC
2. Operating Agreement: An Overview

The LLC document is usually the Operating Agreement associated with the decision-making processes of the LLC. This agreement contains all important processes of the business itself.

The LLC, also referred to as a Limited Liability Company, is a business structure that is easier to form than other types of businesses. While it has similar features to a partnership and corporation, it provides its own benefits for businesses wishing to register as an LLC.

Benefits of the LLC

The LLC provides many benefits, including:

  • Limited liability protection
  • Pass-through taxation
  • Greater flexibility in the management options

Under the limited liability protection, owners of an LLC can’t be held personally liable for the debts or obligations of the business. Therefore, if creditors bring a legal suit against the business, using the personal assets of those owners cannot satisfy any outstanding debt. With regard to pass-through taxation, the LLC doesn’t file corporate income taxes. Instead, the business turns all of the profits and losses over to the owners who report it on their personal tax returns.

Another benefit of the LLC is that it offers enhanced flexibility over other types of businesses. Therefore, LLC owners have freedom in how to manage their business. They are not required to hire a board of directors, officers, or even give out formal roles to the members. Furthermore, if the members want to manage the LLC on their own, then they can do so. This is referred to as a member-managed LLC.

If, however, they would rather hire someone else to oversee the daily operations of the business, then they can operate as a manager-managed business. If they choose to go this route, then they will not have oversight into the daily activities of the business. Instead, those duties will be deferred to the third-party manager, and the LLC owners will have only important decision-making rights over the business operations.

Operating Agreement: An Overview

The LLC Operating Agreement is usually 10 to 20 pages in length. This agreement can also be referred to as a Limited Liability Company Operating Agreement, LLC Bylaws, LLC Operations Agreement, LLC Set Up Agreement, and LLC Partnership Agreement. The agreement can be amended if all members agree to the change in the agreement. If it is amended, all members must sign the amended document in order for it to become legally binding. States like California, Delaware, Maine, Missouri, and New York require LLCs to draft this agreement during the formation process.

It should include various processes, including voting rights, when and how meetings will be conducted, the membership percentage of each member, buy-sell provisions if a member wants to sell his or her interest in the business, what happens if a member dies or becomes disabled, and other items.

While most other states don’t require this document, it is highly advisable, particularly to prevent potential legal suits from occurring. The reason for this is because the Operating Agreement is a legally binding agreement that the court will look to if a legal suit does in fact occur.

Before deciding not to draft this agreement, it is important for you to first indicate whether or not your state requires this document. Thereafter, speak with all members of the company and determine if an Operating Agreement would be beneficial for your business. More often than not, LLCs draft this document. If you operate a single-member LLC, then this type of document wouldn’t be helpful, but for any multi-member LLC (2 or more members), this document is crucial.

Keep in mind that if you and the other members decide to draft this document, all members must sign it. If not, then the court will not deem it to be a legally binding agreement; therefore, the default business rules will apply to any legal suits that arise among members.

For example, some states (absent this agreement) require that all profits of the LLC be shared equally among all members in the business, regardless of how much money each member contributed. Therefore, it is important that all members sign the agreement and are given a copy for their records. Also, an additional copy should be kept on file at the company’s principal place of business.

If you need help learning more about the LLC Operating Agreement, or if your LLC needs assistance drafting this document, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5-percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law, and average 14 years of legal experience, including work with, or on behalf of companies like Google, Menlo Ventures, and Airbnb.