What Is a Business Operating Agreement?
A business operating agreement is used by a limited liability company (LLC). A business operating agreement is like a partnership agreement to a partnership or corporate bylaws to a corporation. As stated on the Nolo website, a business operating agreement allows owners to establish ownership percentages, roles and responsibilities of members and company management structure.
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Significance
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Some states such as California require LLCs to have an operating agreement on file at the business location. Without a business operating agreement, default rules in the state of formation will be used to govern the business. Taking the time to draft a written operating agreement allows the members of the LLC to dictate how they want their business to operate. An operating agreement may be customized to fit the special needs of a business, or companies can obtain an operating agreement template and fill it in.
Liability Protection
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An operating agreement protects the liability of LLC members, particularly in the case of LLCs operated by a single member. According to the Nolo website, in the absence of a written operating agreement, a single-member LLC may resemble a sole proprietorship; without an operating agreement, LLC members run the risk of personal exposure to business debts and losse and business creditors of an LLC may be able to pursue the personal assets of LLC members to recover business obligations. Having a written operating agreement provides credibility for the business as a separate legal entity.
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Profit and Loss Distribution
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An operating agreement allows LLC members to state how business profits and losses should be divided. Since profit and loss distribution may differ from the ownership interest, a business operating agreement should spell out who gets what. If an LLC fails to create an operating agreement, state default rules may call for company profits and losses to be split evenly. This may be unfavorable if one member is investing more into the business than another member.
Voting
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An operating agreement includes information about formal voting procedures. Single-member operating agreements may not contain this provision unless more members will be added to the LLC at a later date. As stated on the Findlaw website, voting occurs according to ownership interest or every member vote counts as one. The voting method used by the business must be listed in the operating agreement, which should indicate how member conflicts will be resolved, such as through a unanimous vote.
Considerations
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An operating agreement explains the process for dissolution and ownership transfer. In most cases, an operating agreement indicates the end date or dissolution date of the business. Furthermore, the operating agreement contains provisions for a member's death or an owner's withdrawal.
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