Your Operating Agreement explains how the LLC will be managed, how taxes are paid, and how profits and losses are distributed.
An LLC operating agreement is a document that customizes the terms of a limited liability company according to the specific needs of its owners. It also outlines the financial and functional decision-making in a structured manner. It is similar to articles of incorporation that govern the operations of a corporation
What is an Operating Agreement?
An Operating Agreement is an agreement for the member(s) of your LLC that sets forth how the LLC will be managed both financially and operationally.
Your Operating Agreement also spells out how much of the LLC each member owns.
You can have 1 member who owns 100%, you can have 2 members with a 50/50 split, 60/40, 70/30, or you can have 3 or more members and you can split the ownership any way you’d like.
The LLC is a flexible business structure. There is no limit on the number of members you can have. And, there are no restrictions on how you split the ownership of the company.
How LLC Operating Agreements Work
An LLC is a type of U.S. business entity that is easy to form and simple to manage, and importantly limits the liability of owners. Since an LLC is a hybrid of a partnership and corporation, it provides the twin benefit of pass-through taxation with limited liability.
o take full advantage of having an LLC, you should go one step further and write an operating agreement during the startup process. Many tend to overlook this crucial document since it is not a mandatory requirement in many states. Only a few states specify the need of putting an operating agreement in place (California, Delaware, Missouri, and New York). But be sure this is what you want before proceeding.
The operating agreement is thus a document which spells out the terms of a limited liability company (LLC) according to the members. It sets forth the path for the business to follow and brings in more clarity in operations and management. An LLC operating agreement is a 10- to 20-page contract document which sets up guidelines and rules for an LLC.
In states such as California, Delaware, Missouri, and New York, it is mandatory to include this document during the incorporation process. While most other states do not insist on including it, it is always considered wise to draft an operating agreement, as it protects the status of a company, comes in handy in times of misunderstandings, and helps in carrying out the business according to the rules set by you.
Businesses that do not sign an operating agreement fall under the default rules outlined by the states. In such a case the rules imposed by the state will be very general in nature and may not be right for every business. For example, in the absence of an operating agreement, some states may stipulate that all profits in an LLC are shared equally by each partner regardless of each party’s capital contribution. An agreement can also protect partners from any personal liability if it appears they are operating as a sole proprietorship or a partnership.
What You Need for Your Operating Agreement
In order to complete your Operating Agreement, you will need some basic information.
- The formation date of your LLC.
- The name and address of the Registered Office and Registered Agent.
- The general business purpose of the LLC.
- Member(s) percentages of ownership.
- Names of the Members and their addresses.
Your final Operating Agreement is not “set in stone”. You can make changes as needed.
Who Needs Your Operating Agreement?
You may need to provide a copy of your Operating Agreement to:
- A lender if you are obtaining financing
- A title company if you are purchasing real estate
- Accounting and tax professionals for financial assistance
- Lawyers for legal advice
- Potential investors or partners who have an interest in your business
How do I complete my LLC Operating Agreement?
The Operating Agreement is an important document and you should not make any mistakes in its content. If you are not familiar with this, you can hire a Reggistered Agent. Which is the best Registered Agent service for you? Click here for more information.