Forming a limited liability company (LLC) requires very specific steps. One of these is crafting the operating agreement. This governs how the business will be handled internally, and it defines the relationship between owners, who are also called members.
Not every state requires an operating agreement, but it’s a good idea to have one in place anyway. This can protect the business and the individuals running it.
What does an operating agreement cover?
An operating agreement covers things like ownership percentages, management duties, voting rights and profit and loss distribution. It also sets specific procedures for adding and removing members. There should also be a process for dissolving the business.
There are other things that the agreement can cover. These include outlining how disputes will be handled, how major decisions will be made and what type of requirements are set for meetings. The more detailed the document, the less likely there will be issues that creep up in the future.
What is the purpose of the agreement?
An operating agreement is a central factor in liability protection. If there’s not an operating agreement, it might be construed that the business is actually a general partnership or sole proprietorship, both of which could put the owners’ personal assets at risk. The operating agreement helps to define the line between personal and business liability.
Not having an operating agreement is also risky because state rules governing LLC operations can be used if there’s not an agreement. There’s a chance that the default rules may not align with what the owners intended for the company. Additionally, the state’s rules can change at any time without input from the owners.
Anyone forming an LLC should consider working with someone who understands these matters to make sure the operating agreement reflects how they actually want the business to run.