A limited liability company (LLC) is a type of business entity in which the owners, who are called members, have only limited personal liability for any company debts or court judgments against the business. The operating agreement is a type of contract among the members of the LLC that governs the way the LLC operates.
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An operating agreement among the members of an LLC serves a similar function to the bylaws of a corporation. It is a legal document that sets out the duties and obligations of the members of the LLC, as well as how the LLC will be managed and operated. The operating agreement does not have a set format and an LLC can tailor it to the needs of the business. Operating agreements for small companies may be short and simple, while those for a larger company with several members, may be more complex.
In some states, operating agreements are required for all LLCs; however, many business lawyers recommend that all LLCs have an operating agreement even if one is not required by state law. This is because an operating agreement offers the members several types of protection. One is protection against misunderstandings that may arise if the rules and procedures are not written down. Another is that an operating agreement can prevent all the members from being held liable in the event that one member commits fraud or other type of wrongdoing. In the absence of an operating agreement, your LLC will be governed by your state's default rules for LLCs. These default rules may not suit your circumstances, and an operating agreement will allow you to run your LLC using rules that suit your specific situation.
What to Include
Every operating agreement is different, but most operating agreements include rules regarding how profit and losses will be shared among members, list each member's financial interest in the company and contributions and note the managerial structure and the procedures for making decisions such as how may members are required for a vote to be held and what issues need a unanimous decision of all the members. Many operating agreements also set out procedures for adding new members, buying out members who wish to leave and rules for what happens when a member dies or becomes disabled. Your operating agreement may also include arrangements to deal with unique situations such as limiting the amount of profit each member can take each year to allow for increased investment in the business.
Writing an Operating Agreement
There are several options available for writing your operating agreement. In a single member LLC, a fill-in-the-blank form may be sufficient. These may be available from your state's business office or secretary of state office. If your situation is more complex, you may prefer to hire an attorney to write the operating agreement. Some attorneys charge a flat fee for this service, others will charge an hourly rate, depending on the complexity. You may also chose to use an online service, which can tailor an operating agreement to your specific needs for a flat rate.