1. What Does an LLC Operating Agreement Do?
2. Benefits of a Restaurant LLC Operating Agreement
3. Factors to Be Considered When Developing an Operating Agreement
4. Application of Operating Agreement in a Single-Member LLC

Updated September 30, 2020: 

A restaurant LLC operating agreement is a legal contract between the owners of a limited liability company, particularly in the restaurant industry, outlining how the company will conduct its business. Even though the members, also known as the owners of the LLC are directly involved in running the company, the business structure in this case provides some tax benefits. It also protects them from being held personally liable for the company's operation costs, debts, and other eventualities.

What Does an LLC Operating Agreement Do?

Given the flexibility that the LLC structure gives the restaurant owners concerning responsibility, role determination, and members' rights, many business owners find it the most convenient structure.

An LLC operating agreement usually anticipates future problems and offers pre-determined solutions. The primary function of any operating agreement in an LLC context is to govern the relationship between the business owners. Any business that takes an LLC structure becomes an entity that is inherently flexible. It allows the owners to designate the investors in the company as either passive or active in their operations and further permits the owners to delegate responsibilities and name the managers.

A restaurant LLC operating agreement can outline how members share losses and profits. Ideally, it is good for any limited liability company partners to create an operating agreement. If, for instance, you opt to operate an LLC business without a terms of service agreement, the company by default assumes operation under your state's laws governing incorporation. Given that each state has its set of incorporation laws, complications may emerge as these state regulations may not match the interests of you and your partners.

Benefits of a Restaurant LLC Operating Agreement

There are five distinct benefits of a restaurant LLC operating agreement:

  • Ownership. It gives room for a unique ownership structure for every bar or restaurant, as there is a clear definition of the interest and property in the agreement.
  • Intellectual property. The operating agreement clearly outlines the company's intellectual property ownership.
  • Voting rights. The restaurant operating agreement highlights each member's rights, especially when it comes to voting on business actions or significant decisions.
  • Distributions and members' management fees. Usually, members in an LLC are entitled to a fixed percentage of the profits of the company.
  • Sale of interests. A restaurant LLC operating agreement spells out how equity may be sold from and to members.

Factors to Be Considered When Developing an Operating Agreement

As you come up with an LLC operating agreement for your restaurant, there are many issues you must consider, such as the following:

  • Who is responsible for the management of the company's day-to-day operations.
  • The obligations, responsibilities, and duties of the manager.
  • The kind of matters that members leave to the discretion of the manager and the ones that are subjective to a vote of the members.
  • Procedures for removing a manager who fails in his duties.
  • The terms of company profit and loss distribution to members
  • The procedures to follow when a member wants to quit.
  • Strategies for the company to raise more money if a need arises.
  • A proper channel through which the company can take on investors as new members if need be.
  • Whatever happens, if the company is purchased.
  • What should happen in an event the business fails

Application of Operating Agreement in a Single-Member LLC

Most people believe that there is no need for an operating agreement when forming a single-member LLC, since the agreement's primary role is to define the ownership terms among members. While this is true, it is notable that as a sole business owner, the operating agreement helps preserve the status of your business' limited liability.

If, for instance, your single business operates under no operating agreement and gets involved in a dispute that proceeds to court, the presiding judge may rule that you are not a separate entity from your single-member LLC business. As such, you will be personally held liable in the dispute in what is known as "piercing the corporate veil." An operating agreement is, in essence, the most vital document you can ever have, as it further determines what happens if your single business fails or succeeds.

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