An operating agreement is used by limited liability companies (LLC) to establish the operations of the business. An operating agreement for an LLC is very similar to by-laws that are used by legal corporations. Within the operating agreement is typically the terms agreed to by members of the LLC, including both day-to-day operating procedures as well as special circumstances.
If you’re ready to complete and file your LLC paperwork then you should also make sure you’re drafting an operating agreement to outline the rules for members of the LLC. This can protect your liability and make sure all members are on the same page with operating procedures and bound to them legally. My Company Works offers same-day LLC filing and we’ll provide you with an operating agreement for your state as a one-stop-shop.
An operating agreement is a legally binding document used by members of an LLC to outline contingencies with their legal relationship within the business. Without an operating agreement then the owners of an LLC would be leaving to chance how a court wants to handle any potential future dispute amongst themselves.
If you have an LLC then it’s important to draft an operating agreement at the time of business formation. It’s not a legal requirement, in most states, for an LLC to have an operating agreement but it is recommended by many legal experts so that your business operations are protected for your needs.
Every operating agreement is typically different because each business has different owners with unique circumstances and relationships. It’s important for some to have procedures in place for taking on money in the future while it’s important for others to establish what happens if one of the members of the LLC gets a divorce.
An operating agreement is a business contract so it’s drafted similarly to any other one. While your articles of incorporation are required to be filed with your state, an operating agreement is not. The operating agreement is optional in many states and rules for these agreements could vary based on the state you incorporate in. You’ll want to partner with a company that is experienced in drafting these within your state, or a local attorney, to make sure you’re creating an operating agreement that benefits your needs.
The operating agreement should contain information about your company and its members. The agreement should include all the information that you find needs to be spelled out in how the various LLC members and manager(s) work and interact together. There might also be some specific laws in your state that you’d like to moderate for your business by including different rules in your operating agreement. Some of the most common terms included in operating agreements are discussed below.
Your operating agreement, and the terms it contains, should be unique to you and your business. You should also include terms that will allow your business to operate differently than any state rules that don’t work for your business. For example, some states require all profits to be distributed equally, unless otherwise stated in your operating agreement.
With those considerations, here’s a list of some of the most common terms you’ll want to think about including inside your LLC’s operating agreement:
These rules are not a catch-all for what is included in all operating agreements but it should give you a good idea of what needs to go in yours. If you’re still not sure then you should contact legal counsel or an experienced company that helps business register LLCs.
The requirements for operating agreements vary greatly by state. Many states don’t require you to create an operating agreement when you register your LLC, but some do. For example, Alabama, California, and Ohio all require you to have an operating agreement if your LLC has more than a single member. This is contrary to other states like Colorado and Connecticut that require an operating agreement for single-member LLCs. If you’re not sure which state to incorporate in, these are the types of things you should be thinking about. Consider our guide on where to form an LLC.
The best action for any LLC is typically to have an operating agreement in effect. If you choose not to draft and execute an operating agreement then your business will be at the mercy of the state operating laws. This isn’t an ideal situation because you won’t be able to clearly define the operating procedures that are important to you and your business.
You may even want to have an operating agreement if you’re the only member of your LLC. Establishing an LLC and including an operating agreement with specific business operating procedures should fully establish your business from being a sole proprietorship and help you further separate your personal and business legal liability.
Even if your state doesn’t require you to have an operating agreement, it’s a best practice to create one when you register your LLC. This is to make it clear how the operating procedures work within your business, even if you’re just a single-member LLC for now. Operating agreements can help protect your business from unfavorable laws or yourself by providing a shield of liability that the courts recognize. When you register your LLC at MyCompanyWorks, you’ll get an operating agreement for your state!
This entry was posted on Thursday, May 21st, 2020 at 9:46 am and is filed under Starting A Business, Corporate/LLC Compliance, Limited Liability Company, Small Biz Management. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.
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