Being a startup founder requires wearing many hats. You have to be a strategist, product developer, salesperson, fundraiser, financial manager, HR and team leader… the list goes on.
Legal advisor is one other role that will be added to this list. For example, if you have an LLC, chances are you’ll need to arrange an operating agreement, depending on the state in which you do business.
In this text, we are going to discuss what an LLC operating agreement is, why you wish one, and how one can create one for your LLC.
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What is an LLC Operating Agreement?
Some LLC Operating Agreement is a legally binding document that outlines the way you will manage your enterprise, make decisions, and make financial arrangements inside your LLC.
It acts as a blueprint for the way you will do it run your enterprisedetailing all the things from member roles to profit distribution.
State law typically does not require an LLC operating agreement. Only five states require an LLC to have one:
- California
- Delaware
- New York
- Missouri
- Maine
Why Your Startup Needs an LLC Operating Agreement
So if most states don’t require LLCs to have operating agreements, why should your startup have one?
An operating agreement can protect yours Limited liability company LLC status by demonstrating that the LLC is a separate entity with separate rules and procedures.
Having an LLC operating agreement also helps establish clear guidelines from the starting, prevents disputes, and ensures that each one members are on the same page.
For example, let’s say you and two colleagues resolve to form an LLC for your small business. And we could say you do not enter into an operating agreement.
However, you verbally agree that no member shall have the right to sell or transfer his interest in the LLC. This signifies that if someone dies or not desires to be a part of the LLC, the remaining members will redistribute the former member’s shares slightly than passing them on to someone latest.
This may sound good, but the default laws in your state allow LLC members to transfer their interests without restrictions.
This signifies that if one of the members of your LLC ever decides to sell their shares, the default rules will likely allow it.
Why?
Because you do not have an operating agreement specifying your ownership transfer preferences.
On the other hand, if you had an operating agreement, you and the other members of the LLC could stop the remaining members from selling their shares.
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Major Elements of an LLC Operating Agreement
An LLC operating agreement consists of several key elements:
- Ownership structure: It shows who the members of the LLC are and their share of the company (percentage of ownership).
- Member roles: Defines the roles and responsibilities of each member (e.g. authority to make decisions, manage every day operations).
- Management structure: Specifies whether the LLC is member-managed or manager-managed.
- Decision making: Details of the way you will make decisions and what kinds of decisions members or managers will make unilaterally.
- Voting rights: Specifies how votes in an LLC are allocated and procedures for resolving deadlocks.
- Division of profits and losses: It determines how profits and losses are divided among members.
- Capital contributions: It provides details of the initial contributions each member will make in the form of cash, property or services.
- Transfer of membership shares: It sets out the rules for transferring ownership interests and any restrictions on transfer, corresponding to requiring the consent of other members.
- Dissolution and liquidation: It provides detailed information on the circumstances under which members will dissolve an LLC, the process for winding up the business, and how members will distribute remaining assets.
- Changes to the contract: Provides a procedure for making changes to the contract, corresponding to requiring a vote by a certain percentage of members.
How to enter into an operating agreement
Determine your needs
Evaluate the structure of your LLC. How many members does your LLC have? How complex are your organization’s operations? How do you intend to administer your LLC?
Answer these inquiries to allow you to determine your management style, kinds of capital contributions, and profit distribution. To further protect your LLC and its members, think about using resources that provide insight into potential threats corresponding to identity theft, data breaches, and other safety considerations that will impact your enterprise activities.
Define key sections
Determine the key sections you would like included in your LLC operating agreement. Some necessary sections are management structure, decision-making powers, and voting rights and decision-making.
Because 60% of business owners need assistance complying with rules and regulations, it is best to seek the advice of a lawyer specializing in limited liability firms. Provide detailed information on management structure, ownership and business goals. On this basis, the lawyer will prepare an operating agreement tailored to your needs for your review.
You can even look for a template online that complies with your state’s regulations. Modify the template to reflect your LLC’s unique structure and operational details.
Collaborate with members
Once you have your operating agreement in place, make a copy available to all members of the LLC. Hold a meeting to debate the document. Use this time to review each section, make clear any confusion, and gather feedback from all members.
After the meeting, revise the draft using the feedback you received. Document all agreed changes.
Once you have made all the essential revisions, show your team the final version of the operating agreement. Before you proceed, make sure everyone is on board signing stage.
Finalize the Agreement
Make sure the final document is complete, accurate and ready for signature. Double check that you just have included all the essential sections and that there are no discrepancies.
If you probably did not initially work with an attorney, consider reviewing the final draft to make sure it meets legal standards and protects the interests of your LLC.
Key Takeaways for Drafting an LLC Operating Agreement
Creating an LLC Operating Agreement is a great approach to lay the foundation for business management, decision-making, and financial management.
Although this document is a legal requirement in some states, it is an necessary tool for ensuring transparency and compliance among LLC members.
Taking the time to draft an operating agreement might help protect your interests and set the stage for sustainable business growth.
Image: Tumisu from Pixabay
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Corporations Today decodes the intricacies of the Corporate Transparency Act, providing the services that you must keep your organization compliant and in good standing. We also offer fast, friendly and reliable filing service in any state, specializing in limited liability firms (LLCs), C corporations and S corporations.
We earn a commission if you make a purchase, at no extra cost to you.