It may have taken some time to assess your business needs and goals; however, you finally arrived at the conclusion that your best business structure is a Limited Liability Company, or LLC. When compared to major corporations, your LLC may appear small and simple, but all types of businesses of any size require specific business agreements to protect the business and promote stable operations.
While there are numerous business agreements to contemplate when creating an LLC, one that should be considered is an operating agreement. While this document is not required by all states, it is better to have one for your LLC than it is to not have one. In essence, this document provides a roadmap to follow, offering ways to avoid potential issues down the road.
What is an LLC operating agreement?
An LLC operating agreement is deemed an essential document, as it ensures everyone is on the same page. Additionally, this document details the governing of the LLC and how it operates. It serves as a mechanism to avoid misunderstandings, especially when there is a multi-member company, and it helps limits the personal risk for the business members.
In an unfortunate event, such as the business falling into debt, a well-drafted operating agreement could protect business members and their personal assets. Furthermore, if a disagreement were to occur between members, the courts will often look at the operating agreement to access rights and intentions of the members.
The essentials
Every LLC operating agreement will differ from one LLC to another; however, there are a few essential components that most, if not all, operating agreements will contain. As such, it is important to consider these when drafting an operating agreement for your LLC.
To begin, it should include a breakdown of ownership percentages for each member as well as the initial capital they contributed. The rights and decision-making responsibilities of each member should be listed and explained. Next, the agreement should include a detailed business plan, allocating the profits and losses of the LLC. Other essential terms include the voting rights of the members, the management structure for the business, the default rules for meetings and voting and the default rules concerning governing.
If you are considering an LLC operating agreement, it is important to understand the benefits this document could provide your business and reasons why you may not need one. A legal professional can help you weigh your options, ensuring your rights are protected with this and other business decisions you make.