Many states don’t require an operating agreement, so you may not even know what one is and its purpose. However, it is incredibly important to have for your business, as it allows you to run your LLC in the way you want, without involvement from the state.
Keep reading to learn about operating agreements and why they are so important.
What is an Operating Agreement for an LLC?
Businesses are not necessarily required to have an operating agreement as far as a law in every state. However, it is highly expected from any business in every state, whether large or small.
Operating agreements are documents that outline a business’ organization in terms of government, internal operations, and how the style of governing supports the business and the owners.
It is also usually signed and then acts as an official contract to those terms written in the operating agreement.
Usually, information such as the decision-making process, profit division, how to handle adding and removing company members, and how the business is structured and run is all included in an operating agreement for an LLC.
Why Do You Need an Operating Agreement?
An operating agreement essentially guides your business. It helps you to organize things such as voting rights, percentages of ownership, and financial matters. Some states require it, but not all. However, it is recommended that no matter the state laws, you get an LLC, as it protects your business and lets it be governed in the way that best suits your needs.
Essentially, it is a way to govern your business yourself, without the state’s laws taking over. This can be important now more than ever with many businesses being solely online, as it can make it less confusing when trying to regulate state laws.
Even if you are a business and are the only owner, an operating agreement can be incredibly useful. It helps to solidify your LLC as a business and promotes it to run properly like a business, instead of simply being an LLC.
It also protects you from liability as it shows that you aren’t running as a sole proprietorship. This can help protect you and your business later down the road if you ever find yourself running into problems.
How to Create an Operating Agreement
Creating an operating agreement by yourself isn’t always easy. They can be as little as five pages, but also upwards of 20. Since an operating agreement is a binding contract, you want to make sure you get it right and put in the proper time and thought into the agreement.
Many websites help to guide you through the process, but it is useful to know how to do it yourself. There are some key points you should keep in mind when making an operating agreement, and you should make sure you include them when forming an operating agreement.
- Name of LLC
- Primary business address
- Business’ statement of purpose for the business
- Taxation plans
- How to dissolve LLC should the need arise
- All names and titles of LLC members, including contact information
- Management structure
- Member duties
- Adding new members
- Removing members
- What happens if a member dies
- How to split the profit
- How voting works
- When meetings are to be held
To put it simply, you want to think about every situation that could arise, from removing a member to dissolving the company, to handing the business over to someone else. Having this information outlined prevents any issues or arguments down the road.
When you and your other members are satisfied with the agreement, it should be signed by all parties and stored in a safe location.