An operating agreement essentially governs the internal functioning of an LLC, much like a constitution, ensuring all members are on the same page about how the company is run.
Importance of Operating Agreement
Why Have an Operating Agreement? An Operating Agreement is a list of behavioural norms that guide the team’s day-to-day interactions with each other.
How to Establish an Operating Agreement
You have two main options when it comes to drafting your operating agreement: you can either create it yourself using online templates and resources or seek legal counsel to draft a customized agreement.
Purpose and Structure of an Operating Agreement
An operating agreement is a key document used by LLCs because it outlines the business’ financial and functional decisions including rules, regulations, and provisions. It sets forth the path for the business to follow and brings in more clarity in operations and management.
An operating agreement is a legally binding document used by businesses like limited liability companies (LLCs) to outline the company’s structure.
Structure of an Operating Agreement
An operating agreement outlines the responsibilities of each member and how they would contribute to the running of the organization.
Benefits and Requirements of Operating Agreement
Overall, an Operating Agreement has many benefits apart from serving for regulation of the corporation member relations. It offers an effective way of setting the ground rules for the company.
Keep signed written operating agreements instead of filing with the Secretary of State. Articles of organization are filed when registering an LLC, not the operating agreement.
Filling Out Your Operating Agreement
- List involved parties – owners (members) and managers.
- Define ownership percentage of each member and capital contribution amounts determining distribution of profits, losses, and voting rights.
- Describe management structure – whether member or manager-managed, how members vote and make decisions.
- Include indemnification provisions protecting managers from member pressure regarding business decisions.
- Multi-member agreements cost more than single-member ones.
How to Write an Operating Agreement
A written operating agreement is a legal contract drawn up during LLC formation. It defines rules, processes, and provisions governing internal operations. Operating agreements differentiate LLCs from sole proprietorships, protecting personal assets.
Once signed by LLC members, it acts as an official contract binding them to its terms.
Creating an Operating Agreement:
- Start an LLC
- Understand state requirements
- Answer simple questions
- Have all members sign to make it legal
Core elements include equity structure, management, voting, liability/indemnification, books/records, anti-dilution protections, and restrictions.
Operating agreements benefit LLCs by defining how they are run even when not required in most states. Have a written one signed by all members instead of relying on insufficient oral agreements.