An LLC Operating Agreement: Is It Necessary?
What is an LLC operating agreement?
An LLC Operating Agreement is a business document that establishes the structure of the LLC (Limited Liability Company), ownership of its members, how the company is managed and dissolved. The document provides detailed information such as name(s) and signature(s) of all members, date of annual meetings, the percentage of members’ interests. An operating agreement outlines the ownership percentage (%) of the company. If your business does not have an operating agreement, state LLC default rules apply. Having an LLC operating agreement helps you avoid state LLC default rules set out by the state in which your LLC is organized. It prevents disputes by defining each owner’s responsibilities and clarifying how decisions are made. It also entails how profits will be distributed internally.
An LLC operating agreement prevents disputes among members
What is an LLC?
An LLC is a business entity that minimizes the personal legal accountability of its members and protects the personal assets of its members.
Steps to Form an LLC
- Decide where to form your LLC,
- Choose a name for your LLC,
- Get a Registered Agent,
- File all LLC formation documents (i.e., Articles of Incorporation, Operating Agreement, etc.)
- Register your LLC,
- Get EIN,
-Open a US business bank account,
-Get business insurance,
-Get an ITIN (if you’re a non-US citizen without SSN),
- File your taxes and annual reports, pay annual fees on time,
- Complying with the city, county, and state requirements (Consult with a Business Lawyer)
Which Documents Do You Need to Form an LLC?
Two main LLC formation documents needed to form a limited liability company are
- the Articles of Organization ( a set of forms to create an LLC in whichever state you’ve chosen to register in and operate) and
- An LLC Operating Agreement.
What Are the Basic Provisions in Operating Agreements?
An ordinary LLC operating agreement includes the following basic elements:
- Identification of managers and members. The names, addresses, and titles of the initial members (and managers, if any),
- Distribution of gains and losses,
- Capital Contributions of each member,
- Purpose of the business,
- Business term (if specified),
- Tax treatment,
- Provisions for new members,
- Transfer of interest, buy-sell provisions which determine what happens when a member wants to sell his or her interest,
- Management rules,
- Binding authority: who can sign contracts for the company?
- Meetings and voting provisions,
- Duties of managers and members,
- Compensation of members and managers,
- Death of a member and dissolution. An LLC operating agreement also clarifies what happens if the owner or member(s) die, leave, or are unable to run the business.
An operating agreement prevents disputes by defining each owner’s responsibilities and clarifying how decisions are made. It also entails how profits will be distributed internally.
An operating agreement helps you avoid state LLC default rules
States Regulates LLC Operating Agreements
Some states’ laws have detailed provisions for operating agreements. New Jersey Revised Statutes Title 42 describes the LLC operating agreement; scope, function, and limitations:
a. Except as provided in subsections b. and c. of this section, the operating agreement governs:
(1) relations among the members as members and between the members and the limited liability company;
(2) the rights and duties under this act of a person in the capacity of a manager;
(3) the activities of the company and the conduct of those activities; and
(4) the means and conditions for amending the operating agreement.
b. To the extent the operating agreement does not otherwise provide for a matter described in subsection a. of this section, this act governs the matter….
Similarly, Texas Business Organizations Code Sec. 101.052 states that the company agreement of a limited liability company governs:
- the relations among members, managers, and officers of the company, assignees of membership interests in the company, and the company itself; and
- other internal affairs of the company….
Why Should You Have an Operating Agreement?
In the USA, some states require an operating agreement for LLCs. In some states, it is only required if the LLC has more than one member. Even if not obligatory by state law, having an LLC operating agreement provides three important advantages:
- An operating agreement helps protect the limited liability aspect of an LLC. LLC owners could be subject to personal liability if the LLC does not have an operating agreement. It means they are operating a sole proprietorship or a partnership.
- - A well-prepared agreement that provides detailed guidelines for operating the business minimizes potential disputes for the members. It describes rights and responsibilities, rules for holding meetings, and voting powers. It determines how profits and losses will be allocated. It is the main legal binding document on how the LLC will be established, managed, and dissolved.
- If you do not have an operating agreement for your business, state laws apply some aspects of your LLC. It makes sure your business is governed by your own rules -- not default rules created by the state in which your business operates. For example, many states have a default rule that requires owners to divide up LLC profits and losses equally, regardless of each member's contribution to the business.
You May Need Following Agreements. Refer to Your Lawyer
- Partnership Agreement Amendment
- Articles of Incorporation
- Business Plan Template
- Amendment to Operating Agreement
- Corporate Bylaws
- Trademark Assignment Agreement
- Single-Member LLC Operating Agreement
- Stock Certificate
- Shareholder Agreement
- Stock Purchase Agreement
- Shareholder Agreement
In A Nutshell:
An LLC Operating Agreement is a business document that establishes the structure of the LLC (Limited Liability Company), ownership of its members, how the company is managed and dissolved. The document provides detailed information such as name(s) and signature(s) of all members, date of annual meetings, the percentage of members’ interests. An operating agreement outlines the ownership percentage (%) of the company. If your business does not have an operating agreement, state default rules apply. An operating agreement helps you avoid state LLC default rules set out by the state in which your LLC is organized. Having an LLC operating agreement helps establish a separate entity from the owner for tax purposes and liability. It provides detailed guidelines for operating the business to minimize potential disputes for the members. It describes rights and responsibilities, rules for holding meetings, and voting powers.
If you need help, then contact us!
We strongly advise you to prepare your LLC operating agreement with the help of an attorney when the business begins. An experienced attorney can make sure all the relevant clauses are included, and he or she can tailor the operating agreement to the requirements of your state and business.
To start and run your business in the US, you need a lot of documentation to be prepared. Legal procedures can be time-consuming and detailed. You cannot be an expert in every subject you need. An expert consulting firm you can trust will save you time and money.
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