An LLC operating agreement is essential for a well-run limited liability company. An LLC operating agreement is a written document that outlines the rights and responsibilities of the LLC members and includes rules about how profits are shared, how members can enter and leave the company and how decisions are made. These are bedrock decisions, and should be committed to writing in an LLC operating agreement.
What Does An LLC Operating Agreement Do?
An LLC operating agreement outlines the rights and responsibilities of the members of the LLC. By having an LLC operating agreement, the members can help ensure that everything runs smoothly and that there is less ambiguity. That means less chances for disputes or expensive disagreements. This helps to build a foundation for a business that can grow.
Here are some things that will typically be included in an LLC operating agreement:
- Member capital contributions: How much money or other capital will each member contribute to starting and running the LLC? The operating agreement should address this so that each member of the LLC will know when and how much they need to pay in. This will help to avoid shortfalls and cashflow crunches that can cripple an otherwise-growing business.
- Voting rights: The LLC operating agreement should discuss how decisions are made. This can be done on a percentage basis, or through some other method. But the important thing is that there is clarity as to what kind of decisions need to be voted on, and what kind of decisions do not need to be.
- How profits are distributed: The LLC operating agreement is the place to put any rules about how and when money will be distributed. Doing this helps to prevent misunderstanding and disappointment among the members. It helps to ensure that everyone gets their fair share of the income.
- How members can leave or join the LLC: This is important as it sets forth what happens if someone wants to leave the LLC, either willingly or unwillingly. Maybe someone isn’t contributing what they agreed to – you want to have a mechanism for removing the person. Similarly, if someone wants to sell their share to someone else, you will want to have a way for the remaining members to approve the buyer.
The main point is that the LLC operating agreement is perhaps the most important legal document in a limited liability company and helps in making sure that all protections are maintained and that disputes do not derail the business. As with many legal matters, the most important part of the LLC operating agreement might actually be the discussions that members have while writing the LLC operating agreement (for this reason alone, it is smart to avoid DIY legal services or sketchy templates downloaded from the Internet). These discussions can help ensure that everyone is on the same page and that all the key issues have a creative, workable solution.
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