What is an Operating Agreement for an LLC?

An operating agreement for an LLC is a document developed by LLCs that outlines the details of the business in terms of how it runs, who is involved with it, and how the finances are taken care of.

All states do not require LLCs to have specific operating agreements. If one is drafted though, the agreements itself should include the following:

  • The name of the LLC
  • The certificate that outlines the members and the formation of the LLC
  • Registered agent name and the address for the individual
  • Terms of the LLC
  • How the members can vote in the organization and their right in terms of voting
  • Whether the business will continue if a member dies and how the business will run if this happens.
  • Specific purpose of the business
  • The address or place where the business resides
  • How members will be added to the LLC in the future
  • How much each member contributes to the business
  • How the profits and losses are handled and how these things are distributed amongst the members
  • Information on how managers run the LLC
  • Powers held by the various members and the managers within the business

The agreement and the way it is drafted is not a state requirement to develop the LLC, but it should be developed anyhow so that there is an equal understanding amongst members and managers in how the business is to run.

LLC Purpose and Details

There are certain things that the operating agreement can definitively help you with. They describe how disagreements can and should be handled. They also indicate how technical operations and money will be handled. Basically, they allow you and LLC members to describe the shaping of how the LLC will evolve in the future.

Operating agreements also allow you to guard your LLC so you can retain limited liability status. It also allows for a detailed record of how you want the business run and it stops misunderstanding and financial management issues before they are able to develop.

An operating agreement can help you and your chosen members if you decide to break up the LLC or part ways. Specifically, the document outlines terms, legal right, protections, and responsibilities of all members.

Organization

The paperwork also outlines the way that each member will be involved, or will not be involved, in the day to day operations of the business. It also determines how individuals will fund the business in terms of their own monetary investment and this how much each person will have a stake or share in the business.

If your LLC is one that is started and run by a single individual, then the operating agreement will indicate that and that there is a single manager. The paperwork will state that since the LLC is run by an individual, that there is no need to split up duties officially.

LLC Accounting

The person who does the accounting for the business should be noted in the agreement and so should the person who oversees distribution of profits. Going over the books and investigations into finances may be something that you want your LLC to schedule monthly or yearly. This timeframe should be stated in the agreement.

Agreement need to outline the profit sharing if one or several members decide to leave the LLC. This obviously is something that is necessary only if there are several members involved.

What Does an LLC Operating Agreement Include?

It is important to include some other details in the operating agreement in the event that a member leaves. For example, there should be a stipulation on whether or not one of the members is allowed to transfer ownership or not. Circumstances that include deaths, bankruptcies, divorces between members, and other types of situations that can cause disruption in the LLC and how this will be dealt with.

Member Withdrawal and Dissolution

Under the agreement, the document will need to outline which circumstances will lead to a complete dissolution of the LLC and how the business will be broken up. Also, there should be information about adding additional members and the role that these new members may play in the business. The types of financial investments need for a member to join the LLC and also how this will be voted on and who has voting rights should be outlined.

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