An LLC Operating Agreement is a legal document that outlines the ownership and member duties of your Limited Liability Company. This agreement allows you to set out the financial and working relations among business owners and between members and managers.
What is in an Operating Agreement?
The form and contents of operating agreements vary widely, but most will cover six key areas of business concern: Organization, Management and Voting, Capital Contributions, Distributions, Membership Changes, and Dissolution.
Typically the operating agreement begins by addressing the creation of the company. It covers when the company is created, who the members are, and the structure of ownership. If there are multiple members, they may all have equal ownership or different amounts of "units" of ownership. It is important to delineate the structure and organization of the company early.
Management and Voting
Next it is usually good to address management and voting among the members.
- The company may be managed by the members or by one or managers that are appointed by the members, and the operating agreement specifies what authority the members or more have over company affairs.
- The company may choose to make decisions though a voting process. Votes may be allocated among the members in any number of ways, including one vote per member, one vote per unit of ownership interest (if the company ownership is described in terms of units), etc. The operating agreement may specify the amount of votes required for particular actions by the company.
It is absolutely necessary to address the capital contributions of each owner in the operating agreement. This section covers which members have given money to start the LLC. It also discusses how additional money will be raised by members. For example, an LLC can choose to issue ownership "units" in exchange for money.
Distributions are important because they determine how the company's profits and losses are shared among members. This might include money, physical property, or other business assets.
Every good company needs to consider how it will add or remove members. It will also likely be necessary to restrict when and how members can transfer their ownership of the company. For example, the company will want to specify what happens if a member dies, a member goes bankrupt, two members divorce, etc.
Finally, it is necessary to take into consideration the potential for dissolution. The dissolution section would explain the circumstances in which the company may be or must be dissolved. This is sometimes called “winding up” the affairs of the company.
Every company is different and has unique needs, in addition to these six key sections, operating agreements may address any number of other topics. For example, members may wish to include requirements for periodic meetings, restrictions on check signing, or explain how disputes within the company will be handled. Keep in mind that your operating agreement can be updated as needed, through a process that should be established in the agreement.
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