What Is an LLC Operating Agreement and Do I Need One?
Starting a business is exciting, but it can also be confusing and daunting. If you’re unsure if you should create an operating agreement for your limited liability company (LLC), the answer is yes. Do you need one? 100%. Absolutely. Every business that registers an LLC should create the operating agreement while in the very early stages, typically while writing the business plan.
What is an LLC?
An LLC is a limited liability company, a type of business registration that reduces tax liability for the registrants. By registering as a limited liability company, you protect yourself from assuming business debt, should you acquire it. If the business becomes insolvent, the registrants of the company aren’t responsible for paying the debt from their resources. Instead, that debt belongs to the business. In essence, the LLC isn’t a separate entity from its owners but protects its members against personal financial liability.
What is an LLC Operating Agreement?
Also known as an LLC agreement, limited liability company agreement, or operating agreement, this is an important document that governs an LLC’s workings or the way the business will conduct itself. An operating agreement is a legal document with comparisons between stockholder agreements, corporate bylaws, and similar documents. The completed articles are filed with the government, usually when filing for incorporation. These articles outline the rights, powers, duties, liabilities, and other obligations of every member of the LLC. It also includes the demographic information of the LLC’s members, the LLC’s registered agent, and a purpose statement.
The operating agreement of your limited liability company is vital to your business. While the agreement isn’t mandatory in all areas, it serves as a record of how the business will run, elevating the professionalism in the eyes of customers, clients, and members.
Sections of an LLC Operating Agreement
The LLC operating agreement is a lengthy legal document that can be upwards of fifteen pages. Due to the comprehensive nature of the agreement, there isn’t a generic template that fits all business types. The focus of the document comes down to this: how will the business behave and who is responsible?
You should draft an LLC operating agreement even for LLCs that have a single guiding member. This type of operating agreement is called a single member LLC operating agreement. When more than one person shares the membership, a multi-member LLC operating agreement is created. In both cases, the agreement is essential for guiding business direction, governance of the members, dissolution of the LLC, and many more legally binding operations.
Here is an overview of the vital parts of the LLC operating agreement and what information to include in each part.
Section One: Information about your LLC
- Formation: Describe when the LLC was formed and by whom.
- Name: This may seem obvious, but you must include the operating name of your LLC.
- Purpose: This can be general or detailed. Generally, this section covers the type of business you will conduct. For example, you might write: The purpose of the X Company is to buy and sell real estate and engage in any lawful activity relating to real estate permitted to limited liability companies in This City.
- Office/Location: This is the address where the business operates.
- Registered Agent: Every LLC should have a registered agent whose role it is to accept tax and business documents on behalf of the company. The registered agent is responsible for keeping the operating agreement and articles of incorporation. Note the registered agent’s information is public. Choosing a suitable representative for your business is highly recommended.
- Names and addresses of members: With a single-member LLC operating agreement, the membership includes only your name and demographics. A multi-member LLC operating agreement covers all members and their information.
- Additional Members: Include how your LLC will proceed to adopt new members. Including protections for yourself make sense. For example, this section might include a sentence specifying that the LLC cannot admit new members without a unanimous vote from existing members.
Section Two: Information about your LLC’s Capital
- There are many ways to word this section, but it must include the origin of any capital and the terms connected with those dollars.
Section Three: Information about your LLC’s distribution of profit and loses
- Profit/Losses: How are profits divided? When is the calculation made? Who is responsible, and how are the profit/losses distributed?
Section Four: Information about your LLC’s management responsibilities and authorities.
- Even if you, as the single member in your LLC operating agreement, plan to manage your company, the operating agreement should have a section that addresses your roles and responsibilities in the business.
After this point, the bulk of the operating agreement focuses on the articles governing accounting, banking, dissolving the business, and special provisions. Each operating agreement tailors to the business it complements. While editing or working with a legal document, be thorough, honest, and have someone else review the work for you.
LLC Operating Agreement…Do I Need One?
Yes, you need one. The LLC operating agreement is an important part of any business. This professional, legally-binding document governs how your limited liability company conducts business and includes information on roles, responsibilities, and authorities of the people involved with creating the company. Every limited liability company should have an LLC operating agreement.