One of the major necessities of forming a Limited Liability Company (LLC) is creating an LLC operating agreement. An LLC will consist of a group of members who have contributed to the formation of the company. Some of these members may have management responsibilities. An LLC operating agreement will outline the rights and responsibilities of the members, as well as their duties. The LLC operating agreement will also specify the percentage of ownership for each member, and how the losses and profits will be divided. Not all state LLC laws will mandate that the business have an operating agreement, but it is very beneficial in maintaining the LLC and avoiding conflict among members.
When an LLC is formed by only one member, called a sole proprietorship, it is still important to create this document to ensure the legality of the business. Sometimes when there is a lack of an LLC operating agreement, in the event of a conflict, the LLC will be governed by pre-set state regulations. This can be a disadvantage to the members. Sometimes members will invest differently in the LLC. One member may contribute a greater amount of money than others, and this person should therefore be compensated accordingly. If an LLC without an operating agreement is subjected to the state’s default rules, the state may require the profits to be divided equally among all members. This would be unfair to the member with more invested in the LLC asset. To avoid this issue the LLC operating agreement should be specific in the way profits are divided individually.
An LLC operating agreement will ensure the protection of an LLC asset, ensure that the members are offered limited liability, and outline management structure. Members can avoid controversy regarding who will make business decisions when this is predetermined by an agreement. Depending on the type of type of business that is being formed, an LLC operating agreement will cover a great variety of issues. Operating agreements should include at least the following:
Ownership percentage of the LLC asset: The amount of money each member has invested will usually determine the percentage of the company that he or she owns. However, sometimes, members may still choose to divide profits equally. As long as this is spelled out in the LLC operating agreement, members can make this determination any way the want.
The duties of each member: Some members may wish to engage only in the financial aspects of the business, while some may wish to oversee the day to day operations.
Voting rights: LLC law does not require that LLCs hold annual meetings, but sometimes it may be necessary for members to vote on a specific topic. Votes may be per capita, meaning that each member will get one vote, regardless of how much he or she has invested in the LLC. Sometimes voting can be determined by LLC asset. Number of votes will depend on the percentage of the company each member owns.
Transfers and buy-outs: The agreement should include what will happen if a member dies, retires, or desires to sell his or her shares of the company to another individual.
In order to create an LLC operating agreement, many people will choose to consult an attorney. This document will protect an individual’s LLC asset, which is why it is extremely important that it is formed properly. There are many online forms available that a person can choose to fill in, but hiring a business attorney will ensure the legality of the document. This is especially necessary for those LLCs that have many members, or contain specific rules and regulations for the management of the company.
