In many states, it is not necessary or compulsory to have an operating agreement for an LLC.
And in other states, it is mandatory.
But irrespective of the rules, it is worth considering why it is a good idea to have an operating agreement in many circumstances.
Personally speaking, I’d create a written operating agreement for an LLC I form that has multiple members (ie is not a single member LLC) or anytime I incorporate in a state where it is mandatory to have one!
What is an Operating Agreement?
An operating agreement is a legal document that outlines the ownership and operating procedures of an LLC.
It is different to the Articles of Association or articles of Organization, which are the documents that actually create the LLC.
The LLC operating agreement is a practical document that sets out procedures, ownership shares, structures and other vital details about the company.
It typically includes information such as the company’s name, purpose, and structure, as well as the roles and responsibilities of each member.
Operating agreements can be customized to fit the specific needs of the LLC and its members, and they can help to prevent disputes and legal issues down the line.
When you use one of our recommended LLC formation services (see below) to create your LLC, you will have the ability to create an Operating Agreement via their platform. It is an easy and straightforward process.
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Do I Need an Operating Agreement?
While not all states require LLCs to have a written operating agreement, it is generally recommended that one be created regardless (although arguably for a single member LLC it is not necessary).
This is because an operating agreement can help to establish the LLC as a separate legal entity, which can provide protections for the members’ personal assets. In addition, having an operating agreement in place can help to ensure that the LLC is run in a fair and efficient manner, which can promote trust and confidence among the members.
Some of the key provisions that are typically included in an operating agreement include:
- The name and address of the LLC
- The purpose of the LLC
- The names and addresses of the members
- The percentage of ownership held by each member
- The rights and responsibilities of each member
- The procedures for admitting new members and transferring ownership
- The procedures for making decisions and managing the LLC
- The procedures for dissolving the LLC
Overall, an operating agreement is an important document for any LLC to have. It can help to establish the company’s structure and procedures, and it can provide protections for the members’ personal assets.
If you are starting an LLC, it is highly recommended that you create an operating agreement with the help of an experienced attorney or online LLC formation service.
Why is an Operating Agreement Important?
An operating agreement is a legal document that outlines the rules and regulations governing the operation of an LLC. Although not required by law in all states, having an operating agreement is highly recommended for several reasons.
Legal Protection
One of the primary reasons why an operating agreement is important is that it provides legal protection for the members of an LLC. The operating agreement clearly defines the rights and responsibilities of each member, and it also outlines the procedures for resolving disputes and dissolving the LLC. By having an operating agreement in place, members can protect themselves from potential legal issues that may arise in the future.
Clarity in Business Operations
Another reason why an operating agreement is important is that it provides clarity in the day-to-day operations of the LLC. The operating agreement outlines the management structure of the LLC, including the roles and responsibilities of each member. It also sets forth the procedures for making decisions, managing finances, and handling other important small business administration matters. By having a clear set of guidelines in place, members can avoid confusion and ensure that the business operates smoothly.
Management of Disputes
Finally, an operating agreement is important because it provides a framework for managing disputes that may arise between members. The operating agreement outlines the procedures for resolving disputes, including mediation and arbitration. By having a clear set of guidelines in place, members can avoid costly and time-consuming legal battles.
What Should an Operating Agreement Include?
An operating agreement is a legal document that outlines the rules and regulations of a limited liability company (LLC). It is not required by law in most states, but having one can help protect the business and its members in the event of disputes or legal issues. Here are some key sections that should be included in an LLC operating agreement:
Ownership Structure
This section should outline the ownership structure of the LLC, including the names and addresses of all members, their ownership percentages, and how new members can be added or removed. It should also specify how profits and losses will be allocated among the members.
Voting Rights and Responsibilities
The operating agreement should specify how voting rights are distributed among the members, including the percentage of votes required to make decisions and how tie-breakers will be handled. It should also outline the responsibilities of each member, including any management or decision-making roles they may have.
Allocation of Profits and Losses
This section should specify how profits and losses will be allocated among the members, including any special allocations or distributions. It should also outline how distributions will be made and when they will be made.
Management Structure
The operating agreement should outline the management structure of the LLC, including who will be responsible for day-to-day operations and decision-making. It should also specify how managers will be chosen or removed, and how their compensation will be determined.
Dissolution of the LLC
This section should specify how the LLC can be dissolved, including the process for winding up the business and distributing any remaining assets. It should also outline any restrictions on transferring ownership or selling the business.
How to Create an LLC Operating Agreement
Creating an operating agreement is an essential step in forming an LLC. Here are the steps to follow:
Using an LLC formation service such as ZenBusiness or Northwest Registered Agent
These services will provide you with a customisable legal template to create the LLC operating agreement as part of their LLC formation service. It makes it much easier than creating one from scratch.
Consulting an Attorney
While it is not required by law to have an attorney draft an LLC operating agreement, it is recommended to consult with one to ensure that the agreement covers all necessary provisions and is legally binding. An attorney can also help identify any potential issues and provide guidance on how to address them.
Drafting the Agreement
When drafting an operating agreement, it is important to include the following basic provisions:
- Identification of the LLC and its members
- Roles and responsibilities of members
- Allocation of profits and losses
- Voting rights and procedures
- Rules for meetings and decision-making
- Buyout and dissolution provisions
It is also important to tailor the agreement to the specific needs of the LLC. For example, if the LLC has multiple members, the agreement should include provisions for resolving disputes and handling member departures.
Reviewing and Signing the Agreement
After drafting the agreement, all members should review it and make any necessary revisions. Once everyone is satisfied with the agreement, each member should sign it to make it legally binding.
It is important to keep the operating agreement up-to-date and revise it as necessary to reflect changes in the LLC’s structure or operations. By following these steps, an LLC can create an operating agreement that protects its members’ interests and ensures the smooth operation of the business.
State Rules on Operating Agreements for LLCs
States where an LLC is required to have an operating agreement:
- California
- Delaware
- Maine
- Missouri
- New York
States where an LLC is not required to have an operating agreement:
- Alabama
- Alaska
- Arizona
- Arkansas
- Colorado
- Connecticut
- Florida
- Georgia
- Hawaii
- Idaho
- Illinois
- Indiana
- Iowa
- Kansas
- Kentucky
- Louisiana
- Maryland
- Massachusetts
- Michigan
- Minnesota
- Mississippi
- Montana
- Nebraska
- Nevada
- New Hampshire
- New Jersey
- New Mexico
- North Carolina
- North Dakota
- Ohio
- Oklahoma
- Oregon
- Pennsylvania
- Rhode Island
- South Carolina
- South Dakota
- Tennessee
- Texas
- Utah
- Vermont
- Virginia
- Washington
- West Virginia
- Wisconsin
- Wyoming
Please note that the laws regarding LLC operating agreements can vary by state and it is always recommended to consult with a legal professional for specific guidance on your situation.
Conclusion
While an LLC operating agreement is not required by law in most states, it is highly recommended to have one in place. It serves as a legal document that outlines the rights and responsibilities of each member and helps prevent disputes and legal fees from arising in the future.
Having an operating agreement also adds legitimacy to your business and can help protect your personal assets in the event of a lawsuit. It is a crucial step in forming an LLC and should not be overlooked.
When drafting an operating agreement, it is important to include key provisions such as the purpose of the LLC, management structure, capital contributions, and profit and loss allocation. It should also detail procedures for dissolution and how to handle disputes among members.
Overall, an LLC operating agreement is a vital component of any LLC and should be taken seriously. It is always recommended to consult with a legal professional when drafting or reviewing your operating agreement to ensure it meets all legal requirements and adequately protects your interests.
