Many LLCs draft an operating agreement as part of its formation process. The purpose of the
operating agreement is to outline your company’s internal operations structure, as well as
ownership and member responsibilities.
Drafting an operating agreement is not a required step to form your LLC, but many businesses find it is a useful tool and can prove an important legal document to have on record. Members can set out and agree to certain terms, conditions, or contingencies that offer them protection in a variety of scenarios.
Every state has its own set of default rules that govern your business if you don’t have an
operating agreement in place that determines otherwise. For example, it is common for a state to
have rules that stipulate how LLC profits and losses be equally divided between membership.
This may work fine for some LLCs and maybe how they would operate anyway. But if, for example, your LLC had several owners that invested different amounts into the company, you may want to tier your profits and losses according to those investment amounts. An operating agreement would allow you to dictate this rule and many other useful governing principles.
If your company is a single-member LLC, it has only one owner or member. While an operating
agreement in this scenario may seem unnecessary, there are still important stipulations that can
be outlined with this document.
For example, if you would like a relative to inherit your business you can set up a transfer of membership provision. Having this plan set up and in writing can ensure a smooth transfer to the relative. Additionally, it is common practice for a bank to ask to see your operating agreement for proof of ownership.
If your company is a multi-member LLC, it has more than one owner or member. In this case,
there are several important facets that can expressed and planned for in your operating
agreement. For example, basic member responsibilities should be outlined, as well as ownership
shares. Having this down in writing will help settle any disputes and ensure each member is on
the same page.
Taking this step in the early stages of your business could end up saving you plenty on legal fees down the road were there to ever be a disagreement about ownership percentages.
Your operating agreement can also set important disclosure limitations for protecting member information. It can also place restrictions on the transfer of shares, which eliminates the possibility of a third-party obtaining voting rights in your company without permission.
While it is possible to draft your LLC’s operating agreement on your own, it is a smart idea to
have the assistance of an attorney. Your attorney can review the agreement to make sure it
covers every crucial component and complies with all state requirements.
It is possible that if certain elements are not accurate or explicit enough, your LLC will adopt the state’s default provisions, which may conflict with your intentions. An attorney can also help you meet all of your state’s required operating agreement provisions.
For all these reasons, we recommend drafting an operating agreement for your business in its very early stages. It is an important step to take for asset protection and member agreement as you move forward and begin to grow. We can assist you with this process and make sure your operating agreement serves as a useful tool and a solid foundation for your business.