Operating Agreement Cost: Everything You Need to Know
Operating agreements cost nothing because they are not a required business formation document in most states, and it doesn't require a filing fee.3 min read
Operating agreements cost nothing because they are not a required business formation document in most states, and it doesn't require a filing fee.
What Is an Operating Agreement?
Operating agreements are written contracts which are created and signed by the members of a limited liability company (LLC). The members of an LLC are its owners. Once all of the members sign the operating agreement, they are bound to its terms.
As a legal document, an operating agreement can be used in court to hold members to its stipulations regarding things like ownership percentages or duties of certain members.
The members of an LLC can benefit from forming an operating agreement early in the life of their company because it gives them an opportunity to make sure everyone agrees on the vision for the company and its operations. Financial relationships and responsibilities can be clearly outlined. Important topics like dissolution, member departure, and more can be covered in this document.
Operating agreements for LLCs are similar to bylaws for corporations, but neither are actual filing requirements with the state.
By signing the agreement, the members of an LLC uphold it as a governing document over the business.
What Is Found in an Operating Agreement?
First, the operating agreement should begin with the formation of the LLC, detailing when it was created, by whom, and how it is structured. LLCs can choose different business structures like corporations, partnerships, or sole proprietorships.
If the company has more than one owner, then the operating agreement should specify how the ownership is divided.
The agreement should also cover the following issues:
- Management structure
- Capital contributions
- Ownership percentages
- Profit distribution
LLCs can choose between two different management structures: member-managed or manager-managed. A member-managed LLC is run by its members. They each take part in its daily operations. A manager-managed LLC either appoints one of the members as the manager of the company or hires an outsider.
Whether an LLC is member or manager-managed, its operating agreement should clearly outline the responsibilities of each member. This will help to prevent miscommunications, unrealistic expectations, and future disputes.
Contributions and Ownership
When someone becomes a member of an LLC, they typically make some kind of material contribution in the form of money, services, or property. This is called their capital or initial contribution.
Corporations require the ownership percentage for each shareholder to correlate with their capital contribution. LLCs have more freedom than corporations in this department. The members of an LLC can choose to give a larger ownership percentage to one person who contributed less than another if they consider them more deserving.
For instance, two members may give a capital contribution of $5,000, but one of those members takes on managerial duties that the other doesn't. The members may decide to award a larger ownership percentage to the member with more duties than the other even though they contributed the same amount initially.
Ownership percentages also affect voting power. Members with more ownership in the LLC have more voting power. This makes the ownership division among members a very important issue. It's good to keep in mind that major decisions regarding the direction and future of the company can be swayed by members who's votes hold a lot of power.
The operating agreement should also outline the voting process and what kinds of decisions required majority votes or supermajority votes and so on.
The distribution of shares should also be covered in an LLC's operating agreement. Usually, shares correspond to the ownership percentages of the members, but this can be changed in the agreement if the members so choose.
If the members want to change the shares to not match the ownership percentages, they'll need to opt for special allocations and follow the appropriate rules.
Operating agreements should also detail when and how profits will be distributed to members. Some LLCs choose to allow members to withdraw their shares from the company profits at will. This is usually only allowed when an LLC has a small number of members.
The best operating agreements are detailed and thorough. The more situations that the agreement specifies, the more prepared for disputes they will be.
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