Just as Bylaws constitute the rule book for a corporation, an Operating Agreement constitutes the rule book for an LLC. The Operating Agreement defines the owners’ rights and responsibilities, and determines how disagreements would be resolved. Absent an Operating Agreement, the owners might find themselves in court, and might have problems with institutions that require an Operating Agreement. Simply put, it is the rule book that governs the operation of your LLC, and protects owners from future problems.
An Operating Agreement should contain a number of basic elements. We recommend that an Operating Agreement include the following:
- Definition of the scope of business to be conducted.
- Description of the primary location for the business.
- Designation of the approved statutory agent, i.e. the person authorized to accept legal documents on behalf of the LLC.
- Listing of percentages of ownership in the LLC.
- Determination of who has authority to act on behalf of the LLC. The operating agreement typically will set forth whether it is the owners (known as members) of the LLC who have authority to manage the company, or whether separate managers will be hired.
- Identification of what issues may be decided by a single member, such as payment of small amounts or management of everyday tasks, what issues require the vote of a majority of members, such as larger expenditures and contractual agreements, and what actions require a unanimous vote of the members, such as substantial contracts, large investments, bankruptcy filings, or other major actions of the LLC.
- Determination of how meetings are to be held, and how votes are to be taken.
- Description of how new members can be admitted, if at all, and how members can be removed or bought out of the LLC.
- Identification of the manner in which distributions are to be made to the members, if the company is profitable, or mandatory contributions made by members, if the business is not profitable.
- Determination of what happens to ownership and management if a member is disabled or dies, or getting a divorce.
- Determination of how the company would be dissolved, either voluntarily or involuntarily by the members.
- Determination of how amendments to the Operating Agreement are to be made.
Additionally, there are numerous other matters that an LLC should address, including employee issues, independent contractors, licensing issues, by-sell provisions, sales contracts, lease agreements, real estate leases and purchases, and operations manuals. We are available for any discussion concerning your LLC, to ensure that you are in compliance with all legal requirements. Please feel free to contact us at any time to discuss any issue in further detail.