Operating Agreements
Outline the rules, regulations, and provisions of your LLC
An Operating Agreement is a foundational document that outlines how your LLC will be managed and operated. While most states don’t require LLCs to have operating agreements, creating one is advisable to ensure smooth business operations and protect members. Equity Doc Prep can draft this for you.
What are the Standard Provisions Included in an Operating Agreement?
Your operating agreement will lay out the amount each member has in the business. For a single-member LLC, the member will have 100% ownership. In a multi-member LLC, this number can vary. The percentage of ownership will total the number of funds that are invested in the LLC.
When forming an LLC, it can be structured as manager-managed or member-managed. The former will allow members to choose individuals to run the business. The latter is where all the members operate the business themselves, equally.
Most operating agreements lay out how the decisions of the LLC will be made and how voting will be determined. It should be identified if there needs to be a majority or unanimous outcome. Many states implement a default ruling that decisions will be proportional to ownership percentages. Allowing your business to determine who has the decision-making authority can prevent management disputes down the line.
LLC members are required to maintain records and bookkeeping for the business. This provision should outline whose responsibility it is to maintain these documents as well as where they will be stored.
Providing detail on how the business will dissolve is important. The operating agreement can establish the protocol and events which can trigger dissolution. There can be sub-sections included such as equity transfer, dispute-resolution agreements, or anti-dilution protections. Consideration should be given to this provision in case the unthinkable or unwanted happens.
In most situations, LLCs are taxed as disregarded entities. This means that the LLC does not file business tax returns. Member(s) report their share of the business profits and losses on their own personal taxes. LLCs can however elect to be taxed as a S-Corp or C-Corp by filing with the IRS. Members can add the preferred tax treatment to the operating agreement.
Reasons to Have an Operating Agreement:
1. Avoid the State “Default Rules”
An operating agreement ensures that your LLC adheres to state laws and regulations. States provide their own "default rules" when companies don't have an operating agreement in place. These default rules are very general in nature. An operating agreement allows the company to have a set of rules in place that may be more beneficial than the states’ rules.
2. Liability Protection
An Operating Agreement protects LLC members from personal liability as long as they act within the agreement guidelines. In some circumstances, owners can still be held liable for their actions as “limited liability” does not mean “no liability”.
3. Prevent Management Disagreements for my LLC
Laying the foundation of how the business will operate can prevent disagreements or disputes regarding the business in the future.
4. Adds Legitimacy to your Business
Having an operating agreement in place reflects the professional nature of your business, making it more attractive to banks, investors, and partners.
Single-Member LLCs
You may think it unnecessary to have an operating agreement for your single-member business. Establishing an LLC can heighten your credibility, and so can an operating agreement. It can show investors you are a professional business and you have plans in place for any mishaps or issues.
Having this agreement can also establish your business as a separate entity from yourself.