An LLC operating agreement is a critical legal document that outlines the financial terms, responsibilities, and rules among LLC owners, also known as members. It is designed to establish individual protections and set clear rules and expectations to help prevent disputes and streamline business operations.
Key Provisions and Requirements
- The document details member rights, contributions, and profit/loss distribution.
- It covers management structure and dispute resolution.
- Five states – California, Delaware, Maine, Missouri, and New York – require LLCs to have an operating agreement.
- The agreement may include components like meeting schedules, voting procedures, and business goals.
- Provisions are tailored to meet the needs of the particular business, ownership, and location.
- Critical clauses address decision-making powers, member contributions, and responsibilities.
- By defining the LLC as a separate entity, operating agreements can limit members’ personal liability.
The LLC is considered a party to its operating agreement, forming a binding contract that governs the company’s internal affairs and the behavior of its members. Ownership percentages within the agreement dictate key aspects such as member voting rights and the distribution of profits and losses.
Member Contributions and Legal Considerations
Every member should carefully review the operating agreement before providing written consent. It is common practice for LLC members to make capital contributions as a term outlined in the agreement, which solidifies their ownership proportionate to the amount invested.
The terms of an operating agreement must meet the requirements of its members and describe in detail how operational and financial decisions will be made, ensuring everyone’s interests are protected and responsibilities clearly defined.
Member vs. Owner in an LLC
There is a distinction between a "member" and an "owner" of an LLC as defined within the operating agreement:
- A member is an individual or entity that has entered into the membership agreement and holds an ownership stake in the LLC.
- An owner, in more colloquial terms, refers to someone with an equity interest in the company, often synonymous with a member.
The operating agreement is the key to understanding these roles and their associated rights and obligations within the LLC.