It’s recommended that all LLCs (Limited Liability Company) create and file an Operating Agreement. This is a formal document that provides a layout for how the business will operate financially and what rules and regulations will be in place for members to follow. This will act as a foundational guideline for the company to follow. Usually it does not need to be filed with the state, but just kept as a record within the company. Below we will look at what an Operating Agreement is in more detail.
What is an Operating Agreement?
Operating agreements consist of various sections that each cover different topics with information about the LLC, its operation, and what agreements between members will be. These sections can be titled differently, but we will look at them as the following: Organization / Formation, Management and Voting, Capital Contributions, Distributions, Membership Changes, and Dissolution.
Organization / Formation
This section will include the necessary details about when the business was formed, what the name and address is, and who the members are within the company.
Management and Voting
This provides information about what members will be elected as managers, or any information that pertains to ownership and what the roles will be for each member. In some companies, if there is more than one member, they can use a voting system to allocate roles and duties, or who the leading manager will be.
Capital contributions refer to how much money was invested in the LLC and who invested it. Additionally, any other financial contributions towards the company will be noted here.
Distributions of Profits and Losses
The information in this section will cover all profits and losses within the company, from various business or physical assets, as well as how it will be distributed among the members.
Membership changes can be anything from members leaving the company for various personal and professional reasons, for example, if a member passes away. It will also stipulate the process of adding new members or what needs to be done when there is a change in ownership.
In the event that the company is dissolved, this section will provide details about the process of how it will dissolve, otherwise referred to as ‘winding up’ the business.
Do I Need an Operating Agreement?
Although most states, excluding California, Delaware, Maine, Missouri, Nebraska, and New York, do not need a record of the Operating Agreement it is still strongly recommended.
Provide Clear Guidelines
If there is more than one member in the LLC, having an operating agreement will eliminate confusion and ensure there are clear guidelines for everyone to follow within the business, as well as what the expectations will be for every member.
If there is only one member in the LLC, creating an operating agreement will indicate professionalism as a company, and ensure a good reputation when dealing with the court or legal offices.
Reference and Record Keeping
For record keeping purposes, a copy of an operating agreement at hand will safeguard the LLC in the event that any member needs to make reference to specific information.
LLC Operating Agreement Template
Companies can create their own operating agreements from various templates online. Additionally, TRUiC provides access to a free tool online to create a custom operating agreement template. The business tool offers different features to suit any type of LLC, for example, the options to add sections or specific clauses, customize it to suit a single-member LLC, multiple-member LLC, member-managed LLC, and manager-managed LLC.
Once the operating agreement is created it’s recommended to store it with other important documents and to update it regularly, especially if there has been changes to members, managers or ownership within the LLC. Create an account in TRUiC’s Business Center to design and customize an operating agreement template to suit your business.