So you’ve decided to start your own business, and now you are forming an LLC. You’ll want to draft a solid operating agreement for your LLC so that you don’t run into issues with your business down the road. But what exactly is an operating agreement and what all should be included? Let’s take a closer look at those questions.
In short, the operating agreement is the document that governs how your business functions. It describes how decisions will be made, the financial interests of all the members, and even how things are handled should you stop doing business. This agreement provides protection for them embers of the LLC and sets out the rules that are to be followed in the course of running the business.
The agreement typically includes many provisions. Let’s discuss some of the key provisions here. One of the major things spelled out in the document is a listing of all the members of the LLC and their capital contribution to the company. This is especially important to note when raising capital to start your company.
Along those same lines, the agreement also should spell out how the members are paid. Typically,members are paid from the profits of the company in proportion to their original capital contributions. However,this doesn’t always have to be the case. Members are free to agree to whatever terms they believe are fair and are willing to accept.
Members of an LLC often come and go, so your operating agreement needs to specify the rules by which new members can be added and existing members can transfer or terminate their membership. Some agreements prohibit new members, while others allow them by a majority vote of the existing members. Regardless, the rules need to be set forth in the agreement.
It is very important that your agreement lays out how business decisions are made between the members. Should a disagreement arise, you need a way of breaking the tie. You can decide that the person with the largest financial interest is the tiebreaker or perhaps the person who runs the day to day activities of the business. The choice is up to you. It may seem unnecessary now, but a time will arise when you need this document.
Why do you even need an operating agreement for your new business? All the members get along well and can make the decisions together with no issues. That may be the case today, but you never know what may happen in the future. You need this agreement in place to protect all the parties involved.
Imagine that you start an LLC with your friend and your business becomes very successful. Things are going great until one day your friend tragically dies in a car accident. Without a proper operating agreement that describes the process for carrying on the business, you could be forced to shut it down as a result.
Many people also think they don’t need an operating agreement if they are the only member of the LLC. This is also false, and you should have one in place for several reasons. First, you want to ensure that you are protected personally by operating completely as a business and not as an individual. Also,you may decide one day to bring additional members into the company, and this agreement would be binding upon them as they come on board too.
In most states, the state law will govern the business functions if no operating agreement exists. In some cases that is fine, but in others it could be devastating. Similarly, if a situation arises in the business that is not addressed in the agreement, you would again turn to the state statutes. Therefore it is of utmost importance to draft and execute a thorough and complete document.
Below is an example of a single-member LLC operating agreement:
1. Names. This operating agreement is made by_________________________, a ___________________ limited liability company, the Company, and __________________________, the Member.
2. Formation. The Company has been formed under the_____________________ statute authorizing the formation of limited liability companies. The purpose of the Company is stated in the Articles of Organization.
3. Offices. The Company will have one or more offices at places the Member designates. The initial registered office of the Company is located at ______________________________ and the Member is the resident agent.
4. Management. The Member has the right to manage the Company's business. The Member may delegate to another person the authority to perform specified acts on behalf of the Company.
[ ] If the Member dies or is unable to act, the Company will be managed by __________________ or by the person the Member last designates in writing to manage the Company. That person will have full authority to manage the Company until the Member can do so.
5. Capital Contributions. The Member will contribute
[ ] $_____________
[ ] the following property:__________________________
to the Company in exchange for the Member's interest in the Company. The Member will not be paid interest on this capital contribution.
6. Taxes. For federal tax purposes, the Company will be taxed
[ ] as a sole proprietorship, with profits and losses passing through to the Member.
[ ] a corporation.
7. Funds. The Member will determine the financial institution that will hold Company funds and will determine the authorized signatures on Company accounts.
8. Additional Members. The Company may admit one or more additional members upon such terms as are determined by the Company and the Member. If new members are admitted, the Articles of Organization and the Operating Agreement will be appropriately amended.
9. Distributions. The Member will determine when and how cash and other assets
of the Company will be distributed.
Name of Business: _________________________, a___________________ Limited Liability Company
Printed Name: ________________, Member
There are many free resources available online today where you can find free templates. Some of those include Rocket Lawyer, eForms, and Northwest Registered Agent. You can also find paid forms with a little more information through companies like Legal Zoom. While these resources can be great, it is always a good idea to engage a local attorney who is familiar with the laws in your state to review the forms before finalizing them.
Even if you think an operating agreement may seem unnecessary today, be sure you draft and execute one as you start your business. It can prevent many problems and headaches down the road. At the very least, find a free template and fill in the information. Congratulations on your new business and best of luck!
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