LLC Management Agreement: Everything You Need to Know
An LLC management agreement is needed when an LLC opts to appoint a manager to run the day-to-day business operations. 3 min read
2. Operating Agreements
3. Benefits of an LLC Operating Agreement
An LLC management agreement is needed when an LLC opts to appoint a manager to run the day-to-day business operations. An LLC is a business organization structure that is regulated by local state laws and becomes active once the proper documentation is filed.
As its name might suggest, personal liability of members is limited in regards to the company's debts and financial obligations. Owners of an LLC are called members, and they can be a natural person or a corporation. Members must have contributed some sort of capital like money, property, or services, in exchange for an ownership percentage. Members' interests differ from shares in a corporation. This is a percentage of ownership based on their individual contribution.
Members can organize the LLC how they see fit, with almost total freedom to create an individualized relationship between members, as well as setting forth the terms that govern the operation and maintenance of the LLC.
Types of LLCs
LLCs can be owned by a single person (single-member LLCs) or by two or more owners (multiple-member LLCs). Creating a single-member LLC operating agreement is more simple than one for multiple members. Single-member LLCs can opt to be taxed as a sole proprietorship and multiple-member LLCs can opt for partnership tax status. With multiple-member LLCs, you have the option to set it up so that all members have the authority to be involved in day-to-day operations, which is called member-managed. Or, you can appoint a manager or management committee, which is known as a manager-managed LLC.
After creating the LLC, the next step is usually making the LLC Operating Agreement. It's not necessarily required under state LLC laws, but having an LLC Operating Agreement is highly recommended. This is a legal document that covers rules and obligations of your LLC. The Articles of Organization do not cover this.
The Operating Agreement shows who owns the company, how profits are to be dealt with, and spells out steps on how any problems will be handled. It can cover specific scenarios and be as detailed as the members think is important. It's a really important document for multiple member LLCs as it can reduce conflicts and costly litigation fees resolving disputes.
The agreement is similar to corporate bylaws. They tend to be long and have a lot of detailed information. It's recommended to obtain legal assistance with this step. While it can be oral or written, it's recommended you put it all in writing. This cements the steps discussed and eliminates confusion if a dispute or conflict arises down the line. And, with multiple members, it's almost certain there will be disagreements or disputes down the line at least once.
The Operating Agreement can also provide details about how internal management will be handled, including how decisions are made, what is the process to add a new member, and when the LLC will hold regular meetings. Details will vary based on a variety of factors that are specific to the particular LLC — things like the number of members, how the management will be handled, investment amounts, profit sharing, and tax considerations.
You may hear an LLC Operating Agreement referred to as LLC Bylaws or a Limited Liability Company Operating Agreement. While an Operating Agreement might not be required, states do require LLCs to file Articles of Organization, which does include some basic business information.
Benefits of an LLC Operating Agreement
Even where an LLC Operating Agreement is not required, there are some additional benefits that should sway you into drafting one. These include:
- It allows you to control your business rather than needing to follow the default LLC state laws.
- They protect the limited liability aspect of the company, as there may be concerns about operating as a sole proprietorship or partnership, which could open you to liability.
- It obviously minimizes the chance of disputes and costly litigation if business arrangements are clearly spelled out in the agreement.
The agreement is also a great tool for reference down the line because it can talk about what to do if a member decides to withdraw, the LLC is dissolving, or you need to admit a new member.
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