Simple LLC Operating Agreement
An operating agreement is an agreement between or among members of a limited liability company (LLC) that outlines and governs how the LLC will conduct it business. Operating agreements, generally, are not required. However, some states such as New York do require an operating agreement so you should consult with your state's business board or business code to determine whether your LLC needs such an agreement.
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Form
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While not required in many states, if an operating agreement exists between or among LLC members, some states such as the District of Columbia and New Mexico do require that the agreement be in writing and stored at the LLC's principal place of business.
Regardless of state requirements, it is always wise to get legal arrangements in a written document instead of relying on an oral agreement. You can draft a simple LLC operating agreement by using an online template or by purchasing software.
Purpose
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Operating agreements have three purposes.
First, an operating agreement can be used as evidence that an LLC is an entity separate from the personal affairs of its members. A court will only shield LLC members from personal liability for acts and omissions of the LLC to the extent it is convinced the LLC is a separate entity.
Second, an operating agreement can settle disputes between or among members regarding an array of issues ranging from shares of profits and losses to assignment of ownership interests because all of the procedures governing the LLC are set forth in the agreement.
Finally, an operating agreement preserves the management methods the members desire be applied to their company. In the absence of an operating agreement, the state will apply its own rules, which may be contrary to the preferences of the LLC's members.
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First Provision: Formation
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The first provision of an operating agreement should address the formation of the LLC. It should include, at a minimum, the name and location of the LLC, the date and purpose of formation, and the duration of the LLC. It should also identify all LLC members and the name of the member who is serving as the registered agent. It can also provide that company assets are to be titled in the name of the LLC and are not allowed to be commingled with personal assets of a member.
Second Provision: Financial Matters
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The second provision of an operating agreement should identify the agreed-upon initial contribution amount of each LLC member. A member's contribution can consist of cash, property, labor and/or services provided to the LLC.
Thereafter, the provision should state the percentage of profits and losses to which each member is entitled. The provision should state that profits and losses include any tax gain, loss, deduction and/or credit.
LLC members frequently agree to allocate shares in proportion to each member's initial contribution, although this is not required.
Third Provision: Management
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The third provision of an operating agreement should explain how the LLC will be managed. All managers should be identified. If one manager is to be responsible for the day-to-day operations of the company, this should be stated. The provision should list acts that the manager is and is not authorized and/or required to do on behalf of the LLC. A statement addressing whether the manager will be compensated for his services should be included.
Fourth Provision: Dissolution
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The fourth and final provision of a simple operating agreement should explain under what circumstances, and how, the LLC can be dissolved. Examples of events triggering dissolution include the death of a member, bankruptcy of the company or an agreement by the members to dissolve. The clause should list the order in which outstanding financial obligations should be paid upon dissolution. Typically, members are paid last and paid according to their percentage of profits and losses.
Warning
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Depending on the purpose of an LLC, the number of members and their preferences, an operating agreement can require more extensive provisions. If you require a complex legal document, consult an attorney who can create a custom operating agreement for your LLC.
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References
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- Photo Credit writing tablet of paper with pen image by Joann Cooper from Fotolia.com
