A limited liability company (LLC) is a business entity that combines features of both partnerships and traditional corporations. Despite not being required by the laws of most states, the members of LLCs often enter into operating agreements to regulate the internal affairs of the business. The intricacy of the operating agreement depends on the complexity of the business and the management structure of the LLC. Usually, an operating agreement includes provisions relating to the financial relations among the members, the management structure and the circumstances under which the LLC shall be terminated.
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Members' Financial Contributions
When forming a limited liability company, each member usually makes a financial contribution to the business. The operating agreement records these contributions and allocates a percentage of ownership to each member. Depending on the number of members, voting rights may then be granted in accordance with this percentage. The method of allocating profits and losses at the end of each financial year is also usually set out in the operating agreement.
An LLC can be managed either by named managers or by one or more of its members. In many situations, the managers of an LLC also have a membership interest, but this structure is not required by law. In either case, the operating agreement sets out the authority of the managers to bind the LLC. Managers usually have the power to carry out all normal tasks in the general course of business, but limits may be placed on their authority to enter into transactions over a certain amount. The operating agreement may also stipulate the circumstances in which a manager is to be removed from his position. If the LLC is managed by its members, the operating agreement often allocates specific roles relating to the organization of the particular business.
Relations Among Members
A well-drafted operating agreement imposes a number of procedural obligations upon members to ensure that the business runs smoothly. For example, members may be obligated to attend meetings at regular intervals. The procedure for admission of new members is also usually set out in an operating agreement.
Dissolution of the LLC
One of the functions of an operating agreement is to define the circumstances under which the LLC will be dissolved. These situations might include the death of one of the members or a change in the nature of the business. The operating agreement will then provide for allocation of the assets of the company among the members.