Many business owners start a limited liability company with the hope of limiting their risk. To do this, they need to have an LLC operating agreement.
You must understand what it does and what needs to be included before you decide to create one for your business.
This article will explain what an LLC operating agreement is and what it includes so that you can decide if you need one or if someone else should get them for you.
What Is the Purpose of an LLC Operating Agreement?
The purpose of an LLC operating agreement is to outline what the members will do regarding how they run their company.
It also outlines what happens if someone leaves and what would happen with debts or disputes among the owners of the LLC.
All members and managers should sign the agreement before it becomes a legal document to know what they agree to.
The LLC operating agreement will keep your business together if you lose one of the LLC members or go through any disputes among members of the company.
It also outlines what would happen with your debts, who should take responsibility for them, and how to divide profits between owners.
How Do I Get an Operating Agreement?
You can create an LLC yourself or you can get one from a lawyer.
If you decide to draft the agreement yourself, be sure that what is included will keep everyone on board with how things are run or what happens if someone leaves.
A registered agent can also help you by drafting your agreement and then sending it to all members.
You can also use LLC operating agreement templates, which are available on the internet.
These templates typically have what is needed to run a successful LLC, but you will still want to adjust them for your specific needs and include what's relevant for your business.
What Is Included in LLC Operating Agreement?
Whether your business entity is a single-member LLC or a multi-member LLC, there are some default rules an operating agreement should have.
The following are some of the things that an LLC operating agreement should include:
The first section of an LLC agreement should include information about the LLC's organization.
This section should explain who is in charge of running the company, how the members will run it, and when it was founded.
This is just the basic info that should lay the grounds for more in-depth sections to follow.
Structure and Management
LLC's can be either manager-managed or member-managed. Depending on the type of management you opted for, your operating agreement will differ.
The operating agreement for a manager-managed LLC should contain information about the roles of each member, how they will be compensated and what their responsibilities are.
The operating agreement for a member-managed company should include similar information, but it doesn't need to explain specific managerial positions or members' duties.
LLC Member Voting Rights
The voting process is essential for an LLC, so all operating agreements should include this point. In states that allow members to vote using a secret ballot, the voting process should be detailed.
Those with open ballots may just need an overview or mention of how and when votes will take place.
Sometimes, LLC owners vote depending on their ownership percentages (one unit of ownership interest means one vote).
Other times, they vote based on the overall percentage of ownership. In either case, an LLC operating agreement needs to include information about who has voting rights and what constitutes a quorum.
LLC capital contributions are a thing that every member should understand.
The operating agreement should lay out what constitutes an initial contribution and how regular contributions will be made.
This includes the frequency of these transfers, any restrictions on when they can occur (for example, if there is a time limit for transferring money), and who makes them in the first place (the LLC or the members).
The operating agreement should also include information on initial capital contributions from outside sources.
These could be loans, a partner's contribution, or investments in return for an ownership percentage.
This section of the LLC Agreement will explain how these transactions take place and what they mean to each member.
This section must be thorough as its contents can drastically affect the financial situation of each member.
LLC operating agreements should contain provisions explaining how business assets and personal assets are distributed among LLC members.
The distribution provisions in an operating agreement can be either a default provision, or they may require unanimous consent of all the LLC members for any change.
In some cases, it will make sense to put restrictions on when distributions can occur if the business is still generating profits.
Still, you would like to delay the company from actually distributing any profits until it has been generating a profit for an extended period.
Changes in the Structure
This section of an LLC operating agreement specifies what happens in case of membership changes.
These provisions will describe what happens if new members join or initial members leave.
They may also specify what happens if you convert a business partnership to an LLC or merge one LLC business with another.
If new members join, this section of the agreement will specify how their capital contributions are treated and what percentage of a member's interest in the business they own.
If initial members leave or die, there may also be terms specifying what happens to any business assets distributed to them as part of the business partnership.
You should carefully review the provisions in this section because they can have significant financial consequences for the current members of the business entity.
The agreement should also include what happens to the management structure if someone leaves or what has to happen for a member to leave.
It includes what will happen with remaining members and assets and what debts are leftover from the business, such as tax liabilities.
If a member wishes to leave, the business can be dissolved, and a buyout agreement can be created.
If business partners agree that one partner will take over the business, they can buy out their business partners.
The business partners can wind up company affairs, or court orders can require dissolution.
Can I Write My Own Operating Agreement for My LLC?
Yes, you can write your own LLC agreement if you're the business owner.
If there are multiple owners, it is best to have an attorney or law firm draft legal documents to ensure they adhere to LLC laws.
Is an Operating Agreement Required for an LLC?
No, state law doesn't require LLCs to have an operating agreement. However, we highly recommend having one in place for business purposes.
The basic information laid out in operating agreements sets the ground rules for business members.
It can be as detailed or loose as the business owners prefer, but it is a good idea to have one in place so that all business stakeholders know what will happen when certain events occur.
How Do I Find My LLC Operating Agreement?
You can find your operating agreement by searching for your business name at the Secretary of State official website.
Some states may have additional requirements for those who request an LLC agreement. Usually, you'll be asked to fill in a form and pay a fee.
How Do I Change My LLC Operating Agreement?
You can change your LLC operating agreement by amending it. To amend your LLC operating agreement, you must follow the rules of business formalities and comply with the procedure for making changes you already specified in the current operating agreement.
If you don't follow the rules for making changes, other members might object or even sue.
The amendment should state that it is an amending agreement to the original legal document and date when amended.
Amendments made don't have to be filed with the Secretary of State.
How Much Is a Limited Liability Company Operating Agreement?
The cost of LLC operating agreements varies. If you're making your own LLC operating agreement, the only cost you'll have to cover is the template you can purchase online.
The price of online templates can go as much as $200, but if you dig deeper, you'll be able to find some free LLC operating agreement templates.
Suppose you decide to hire a business lawyer to do this for you. In that case, the cost of this service will probably depend on the type of your LLC (single-member LLC and LLCs with multiple members usually need slightly different operating agreements).
Does a Single-Member LLC Need an Operating Agreement?
Single-member LLCs do not need an operating agreement to make business decisions or conduct day-to-day business operations.
However, there are several reasons why it's better to have an operating agreement even though you're not a multi-member LLC.
An operating agreement secures your personal liability and helps define business relationships, protect your intellectual property, and avoid disputes with other single member LLC business owners.
What Is an LLC Operating Agreement Amendment?
An operating agreement amendment is a document created and updated when the business or personal assets are transferred.
For example, suppose you buy a new building for your business but don't transfer it into LLC ownership.
In that case, an amendment will need to be filed when the title finally transfers, so there's no discrepancy between what was stipulated in the original written agreement.
What if an LLC Has No Operating Agreement?
If an LLC doesn't have a written operating agreement, it is difficult for members to know their rights regarding distributions of profits and losses, additional capital contributions, and ownership interests.
Although not legally required, an operating agreement shields ownership interest and business assets from business creditors.
If the business is sued, members can only lose those business interests they have agreed to put at risk by joining in the LLC's activities.
Without an operating agreement, it may be necessary for business creditors to liquidate business assets to meet business obligations.
On top of that, you're risking your corporate veil, which means the chances are the court might decide to treat your business as a sole proprietorship.
Lastly, not having an operating agreement means that state default rules may be applied if there is a need for settlements or any other type of legal trouble.
How Voting Works in an LLC Without LLC Operating Agreements?
This means that if you have two partners and one partner has a different idea about doing something, they can act on it because they're in charge.
The other partner will either need to get together enough votes from their co-members or work with them to compromise.
Member meetings are held to vote on business matters, and an operating agreement is more important when it comes to personal issues.
To avoid this cumbersome voting process, LLCs should always create agreements. Without them, business decisions can be made by one partner's strong opinion.
Any limited liability company should have an operating agreement that keeps the business running smoothly.
This document can be beneficial to avoid conflicts and disagreements among members and establish how much protection each member has regarding liabilities of the company.