The operating agreement of a limited liability company sets the guidelines and regulations for the company's business functions and structure. The agreement is typically prepared by the founding owner or owners, referred to as members, and kept by the LLC. An operating agreement is a legally binding document once signed by LLC's members, functioning as a contract. The agreement may be amended by the members if changes are needed.
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The exact content of an operating agreement varies by company, but common areas addressed are the procedures for admitting a new member or expelling a current one, the procedures and rules for profit distributions to members and voting rights. The LLC ownership percentages of each member are set out, as well as the authority and obligations of all members and the directions for buying and transferring shares of deceased or resigning members. As members leave and the business changes, amendments to the operating agreement may be necessary to reflect the LLC's current state of operations.
The operating agreement sets out what is expected of each member and concrete procedures for handling business events. Some states do not permit unequal treatment of members, and treating members differently with regard to the same issue may open up the LLC to a lawsuit. A written agreement provides the LLC with a set of rules to follow each time the company takes action or makes a decision, and a rule about the number of votes needed for any amendments can be included. An LLC that does not have a written operating agreement may be subject to the default provisions found in the state's LLC legislation.
Smaller changes, such as adding a new member, can typically be handled by the execution of an amending document that cites the previous section, adds the new information and is passed by the necessary number of votes from the members. The amendment is then attached to or kept with the original agreement. Larger alterations to an operating agreement may be difficult, especially if multiple sections are being revised; a new agreement may need to be drafted instead.
Operating agreements cannot violate state laws. State LLC laws generally allow the agreement to govern the LLC's affairs, but some limitations apply, like a distribution to a member in an amount that wouldn't permit the LLC to pay its creditors once the funds have been transferred. Amendments to the operating agreement are subject to the same limitations found in state laws.