1. What Is an Operating Agreement?
2. Why You Should Have an Operating Agreement

It is important to have a member agreement for your LLC in place, whether you're planning to run your company on your own or in partnership with additional owners, or members.

What Is an Operating Agreement?

Companies that are organized using a corporation business structure have corporate bylaws in place that document the operations and expectations of the company. An LLC needs to have a similar document in place. Rather than corporate bylaws, however, an LLC will need to draft a member agreement, otherwise known as an Operating Agreement. A member agreement may be referred to using a number of different terms, including:  

  • LLC Operating Agreement  
  • LLC Bylaws  
  • LLC Setup Agreement  
  • LLC Partnership Agreement
  • LLC Operations Agreement  
  • Limited Liability Company Operating Agreement

Regardless of the term you use to refer to your member agreement, this document is used to detail the guidelines for your company in a similar way that the Articles of Incorporation for a corporation govern its operations. The specific details included in your member agreement will vary depending on factors such as:  

  • Tax considerations  
  • How many members your company has  
  • The company's management structure  
  • Investments and profit sharing structure

If your company includes more than one member, your member agreement will become a legally binding contract between you and the rest of the LLC members. If your company is going to include two or more members, who will all be involved in the company's daily business activities, you'll want to use what is known as a Multiple Member-Managed LLC Operating Agreement. If, however, you have multiple members and not all of them intend to be involved in daily operations, you'll need to use the Manager-Managed LLC Operating Agreement. Or, if you are going to be the only LLC member, you'll simply need the Single Member LLC Operating Agreement.

Why You Should Have an Operating Agreement

Having a member agreement, or Operating Agreement, is a requirement in some states. Even if your state does not specifically require your LLC to have a member agreement in place, it is still a good idea to draft one because they serve other important purposes. If, for example, your company will have more than one member, it's important to have a written member agreement in place.

An LLC with more than one member will want to put a Multiple Member-Managed LLC Operating Agreement in place that outlines how members, or owners, are expected to manage the company's daily functions. LLC companies with multiple members are more susceptible to ending up in a dispute if members fail to establish proper expectations in the company's formative stages. Starting a new business can be very exciting. Regardless of this excitement, it's important to outline these expectations early so there are no misunderstandings later on in the company's lifecycle.

A lot of people are hesitant to have difficult conversations about how to handle things when you no longer get along or the company does not perform well, but these are important details that should be worked out among the LLC's members as early as possible.

If your company has more than one member and not all of them are going to play an active role in the daily operations of the business, you'll most likely want to draft a Manager-Managed LLC Operating Agreement. If, however, all of the members plan to have a hands-on role in the company, it's not necessary to overcomplicate the member agreement. In this case, it's fine to keep things simple as long as all members agree with the items included in the agreement.

In an LLC, members are effectively owners of the company. The only real reason to transition from a Multiple Member LLC to a Manager-Managed LLC is to protect members' privacy by including only the names of the company's managers when you file documents with your Secretary of State. Managers are not necessarily required to be members. This makes manager-managed LLCs potentially more private structures than member-managed LLCs.

If you want to keep things simple, though, a Multiple Member-Managed LLC Operating Agreement should be more than sufficient for you and the rest of the company's members.

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