WHY DO I NEED AN LLC OPERATING AGREEMENT?
A limited liability company (“LLC”) is a popular type of U.S. business entity that is easy to form and manage. As a cross between a partnership and corporation, an LLC provides the benefit of both pass-through taxation and limited liability. While an LLC has lower state-required recordkeeping formalities than a partnership or corporation, when forming an LLC, business owners should take time to prepare a well written LLC operating agreement. This document should not only control how the LLC entity is structured and managed but also spell out the terms of relationship among its members / owners. This article answers questions about why having an LLC operating agreement is important and what terms it should contain.
What Is an LLC Operating Agreement?
An LLC operating agreement is a document that establishes the rules, structure, management and operation of each specific limited liability company, based on the specific needs of its members. LLC operating agreement is similar to articles of incorporation that govern the operation of a corporation. It helps LLC business owners’ asses the risk of their business and mitigate important issues before they arise. It should outline the structure for major financial and functional decision-making. Once signed, the document acts as a binding contract between the members that serves as a reference document during the life of the company.
Do I Need To File My LLC Operating Agreement With The State?
Unlike certificate of formation or articles of organization, an LLC operating agreement does not need to be filed with the state. Certificates of formation or articles of organization are public documents that are filed with the state to form the LLC. They contain important but basic information such as company name, whether it will be member or manager managed, the name and address of the registered agent and the name of the LLC organizer. By contrast, LLC operating agreement is a private document containing detailed information that is often confidential and may not be desired by the LLC owners to be shared with the public.
Am I Required By Law To Have An Operating Agreement For My LLC?
Although writing an operating agreement is not a mandatory requirement for most states, it is crucial to have a written operating document for members working through a limited liability company. Without a written operating agreement, management and ownership of the business will be handled in accordance with state’s default LLC rules. Most people do not want to run their business only according to the default rules of their state. While state default provisions address some operations of an LLC, a well written operating agreement can override statutory presumptions allowing owners to govern their internal operations according to their own rules and specifications. For example, in the absence of an operating agreement, some states may require that all profits in an LLC be shared equally by each partner, regardless of their respective capital contributions. A written LLC operating agreement should protect each individual member’s investment and reduce the risk of issues or misunderstandings that can arise between partners. LLC operating agreement should outline governance procedures, such as meetings and voting, specify the rules of succession and transfer of ownership interests.
Does a Single Member LLC Need an Operating Agreement?
Some states, including New York, Missouri, and California, require a limited liability company to have an operating agreement, even if it only has one member. When not required, a written agreement is strongly encouraged for protection of the member from various problems the LLC may encounter, including legal liability.
What Should be Included in an LLC Operating Agreement?
A typical LLC operating agreement is a 10-20-page contract document that provides guidelines for company operation and rules for the LLC members to follow. It should contain some of the following provisions:
- Whether the LLC will be managed by its members or managers
- How the LLC chooses to be taxed, how long it intends to operate, and where it is located
- How the management team will be selected
- Who and how will be making business decisions
- How meetings will be held and votes made (and what percentage will be required for approval of business decisions)
- The duties and responsibilities of the LLC members or managers
- Appointment of LLC officers and their duties and responsibilities
- Allocation of profits, losses, and tax liabilities
- The process of transfer of ownership interests
- The process of bringing in additional members
- Buyout and buy-sell provisions (when a member wants to leave and sell their share)
- Succession plans (including what will happen in the event of a member’s death)
- Events that could trigger the dissolution of the LLC
- When and how the LLC will be dissolved
- List of each member’s ownership interest
Can I Write My Own LLC Operating Agreement?
It is best to consult an experienced attorney and tax advisor for help with the financial and legal aspects of your LLC operating agreement. If you want to try drafting your own operating agreement, be sure to have a business lawyer review it before the members sign it. Avoid free templates because they may contain inappropriate jurisdictional requirements, omit critical terms and fail to properly address the desires of LLC members. Or worse, a free template could set forth the members’ rights in ways the members do not want. Some states require the use of specific terms or information that may be missing from a free template, leaving you open to liability. For example, failure to include detailed information and terms for resolution of business disputes or member disagreements may result in costly litigation.
Can an LLC Operating Agreement Be Amended?
The process of amending an LLC operating agreement should be provided in the agreement itself. When not stated in the agreement, the amendment process will be determined by the default rules of the LLC’s state of formation. Procedure for amending LLC operating agreements may vary. Some LLC owners may require amendment to be made by a unanimous vote of all members. It is also possible for an LLC to have an operating agreement that cannot be amended.
- An LLC operating agreement is a legal document that contains the terms of operations of a limited liability company
- It gives the business a plan to follow and brings clarity to its operation and management
- In some states, the operating agreement is required as part of establishing the business entity
- One size does not fit all LLC operating agreements
- An LLC without an operating agreement will be governed by the default state rules
Once your agreement is signed, keep a copy of it in a corporate notebook with your other important business documents. Don’t forget to review it frequently to ensure it still reflects the needs of the members and provides specific operational guidelines that take precedence over the default provisions of state law.
Signing an LLC operating agreement should be made after a consultation with an attorney and a tax adviser because it involves consideration of issues regarding tax, liability, management, continuity, transferability of ownership interests, and formality of operation. Business attorneys at FILIPPOV LAW GROUP, PLLC can help you prepare a well written operating agreement that meets the needs of your business and wishes of your LLC owners. Email us at email@example.com with your questions or to schedule an appointment.
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