An LLC, or limited liability company, is a business that combines the features of a corporation and a business partnership. LLCs can be composed of several members, not shareholders or partners as in corporations or partnerships, whose assets are distinctly separate from the business itself; therefore, unlike in partnerships or corporations, members of an LLC have limited liability for the debts of the company. Operating agreements are an important key to determining the relationships among members in an LLC and delineate business responsibilities and protocols.
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Many states do not legally require an LLC to create an operating agreement . However, a few states, including Missouri and New York, do require operating agreements, according to Missouri Statute Section 347.081.1 and New York LLC Act, Section 417, respectively. While many states may not require an operating agreement, some do have requirements regarding operating agreements should they be created. For instance, several states, including Arkansas and New Mexico, do not require operating agreements but require that operating agreements, if created, be in writing. Other states, such as Alabama, require that operating agreements created for LLCs with more than one member be in writing.
A well-written operating agreement can clearly establish the relationships among all members, the responsibilities of each member to the business, and other member and managerial obligations. Without an operating agreement, default rules of the state of incorporation will govern your LLC, according to LLC Made Easy. Therefore, even one-person LLCs establish operating agreements to ensure that their LLC has clear rules of direction as established by the LLC rather than the state of incorporation.
The Operating Agreement
An operating agreement is a legally binding document that creates protocols for managerial methods, members' voting privileges, profit and loss responsibilities, dissolution of the company, and other pertinent business-related information. An operating agreement should contain detailed and clear information regarding ownership, especially if an LLC has more than one member. The agreement should also contain information regarding members' rights and conduct expectations; managerial rules and agreements, such as meeting management guidelines; and a provision that delineates how the LLC will act if a member dissolves his involvement with the company.
Creating the Operating Agreement
Even though many states do not require an LLC operating agreement, and many states will accept oral operating agreements, many LLCs choose to create an operating agreement to avoid default management by state statutes. Written operating agreements can be completed by using online fill-in-the-blank forms, can be drafted by the member or members of an LLC, or can be drafted by the LLC's attorney.