Limited Liability Companies, or LLCs, can be a very beneficial business entity because of the limited liability benefits and the minimal formalities that are required, compared to a Corporation. The one requirement of an LLC that makes it more complicated than a Sole Proprietorship or Partnership is the need for an Operating Agreement.
What is an Operating Agreement
The Operating Agreement, which is required by most states when forming an LLC, is a formal document that lays out the details of the business’s structure, including the financial and functional decisions. Limited Liability Companies are governed by the Members of the LLC, and the Operating Agreement will also lay out each Member’s percentage of the LLC, as well as delegate the Managing responsibilities of the company. Additionally, an Operating Agreement may designate voting power of the members, distribution of profits and losses, meeting requirements and information, and information that pertains to the buying/selling of the company or members. Once signed by all Members, the LLC Operating Agreement is a binding contract that binds the LLC, as well as the members of the LLC, to the agreed upon terms in the Operating Agreement.
How does the Operating Agreement protect you?
The LLC Operating Agreement protects the company’s limited liability status by enforcing the protection of members from any personal liability of the company in writing. In addition, the Operating Agreement can lay out any matters that were verbally agreed upon with fellow members. This can prevent future lawsuits, as well as streamline any future decision-making. Members are much less likely to disagree about future proceedings/decision-making if the terms are in writing.