Before entering into business with people, no matter who they are, it is always absolutely essential that you have an agreement of some kind in order to properly explain what the terms of your agreement are, that’s exactly what operating agreement is meant to do.
What is an LLC Operating Agreement?
An LLC operating agreement is a legal document drawn up alongside the establishment of an organization to give clarity and legal guidance around all future business activities and various member responsibilities, liabilities, duties and rights. Although only legally required in some states, it can substantially contribute to the odds of a business surviving because, particularly in a time of difficulty, members can look back on the document for clarity and management guidance. This agreement generally addresses the following areas of a business;
An operating agreement for an LLC all the elements involved in establishing the organisation such as the name of the company, who the members are and their selected management structure
Management and Voting
Entrepreneurs can never fully anticipate all of the challenges that will arise when managing their business. By outlining how the company will address how the organisation is managed on a day to day basis as well as the allocation of the specifics of various voting measures they can maintain good relations and fairness within the company.
The agreement also keeps track of the capital amounts that any members may have contributed towards the business as well as outlining how the business plans to raise any future capital.
Given that in an LLC, is different to a partnership in that they are required to allocate funds in a more structured way, the agreement provides provisions and instructions as to how the company’s profits, losses and assets are to be shared among members.
If something should happen to a member of the business that would alter their participation in any way; bankruptcy, divorce or even death, then the agreement will be able to provide clear instruction as to what procedure should be followed and protocol should be followed when dealing with all of these matters.
Should your business need to be dissolved due to any kind of internal issue – or even external for that matter – then the agreement drawn up needs to include an article giving clarity around various dissolution matters.
Although the agreement structure generally follows the above format, each business is different and so if is room for any and all additional business stipulations. However, you are able to create and exceptional custom operating agreements by utilizing third parties and it was
How to know if your business needs an operating agreement.
Although, as mentioned earlier, an agreement is not legally required by all states, if you are anywhere other than California, New York, Delaware, Maine, Missouri or Nebraska, then you’re free to start your LLC without registering an operating agreement. You should still most definitely still draw up an operating agreement because all businesses need them and it can have an exceptionally important role to play in effective relationship management for multi-member LLC’s and the relationship with both financial and legal institutions for sole owners. Operating agreements are able to and secure the long term success of the business.
Forming and running a successful LLC is tough enough on its own, and so having a written document upon which all members and employees as members of the public can refer back to in order to help guide them in their decision making and ensure all parties involved are legally protected and have full knowledge of the future plan.