What Is a LLC Operating Agreement: Everything to Know
The operating agreement is a legally binding document that details certain aspects of your LLC business.3 min read
2. Why You Should Have an Operating Agreement
Understanding what is an LLC operating agreement is important when you're forming a new business. The operating agreement is a legally binding document that details certain aspects of your LLC business, such as:
- Membership requirements
- Duties members are expected to carry out
What Is an LLC Operating Agreement?
An LLC operating agreement provides you with the opportunity to document things such as:
- Financial relations between members and managers
- Working relations between members and managers
The operating agreement can be compared to a corporation's bylaws because it outlines how your limited liability company will operate, with details including, but not limited to:
- Daily activities
- Member details
- Duties members are expected to carry out
The operating agreement is s special business document that outlines how your LLC will operate and details agreements among your company's members. This document will detail the terms and conditions that each member in the LLC will be expected to agree to and uphold. Your operating agreement should include every potential contingency in an effort to protect the company's members in a number of possible scenarios.
This contract should document what should happen in specific situations, not only in the company's daily operations but also in special cases. For example, your operating agreement should include details regarding the process for when a member chooses to leave the company, experiences a divorce, or passes away. The document should also detail specific duties and responsibilities members are expected to perform on a daily basis.
Operating agreements will differ greatly from one limited liability company to another. This is because the people and specific circumstances surrounding different companies are rarely similar. An LLC's operating agreement should outline specific guidelines for the company, similar to the way a corporation's articles of incorporation determine how its operations will proceed.
The details found in your operating agreement will vary depending on things such as:
- Company-specific tax considerations
- How many members your company will have
- Your company's management structure
- How you'll share profits
If your company includes more than one member, the operating agreement acts as a legally binding contract among all the LLC's members. While each company's operating agreement is different, states may require certain language to appear in each one. While specific state requirements may be different in regards to required language and the sections in which it appears, certain requirements usually apply across the board.
An LLC operating agreement may be referred to by other names, such as:
- Limited liability company operating agreement
- LLC bylaws
- LLC operations agreement
- LLC setup agreement
- LLC partnership agreement
Once your operating agreement is finished, you're not required to file it with the state. You should keep this document in your company records and provide a copy to each of the LLC's members. After a major event that has an impact on the company occurs, such as gaining or losing an owner, it's good practice to review the operating agreement and consider making updates to the document when necessary. Operating agreements can be amended at any time, so long as each of the company's current members agrees to the proposed changes.
Why You Should Have an Operating Agreement
To begin with, an operating agreement provides you with a means to establish control over your business, rather than relying on local state laws. If an agreement does not exist, state laws, known as "default rules," will kick in to govern certain aspects of your limited liability company. In some sense, you can consider these default rules to be a standard Operating Agreement that can be used if you fail to create your own. Some states, for example, have default rules that automatically establish members as equal owners within the company, regardless of the size of the financial contributions each member has made.
Another reason to have an operating agreement in place is that it protects the limited liability aspect associated with your company. Without an operating agreement in place, members can more easily become subject to personal liability issues if it appears that the company is being operated as a partnership or a sole proprietorship, rather than a limited liability company.
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