The LLC operating agreement is an important document, from the point of setting up a firm with limited liability to the owner/partners. Understanding how to prepare this document is necessary.
An agreement which governs the working of a limited liability company (LLC) can be simply stated as an LLC operating agreement. Preparing it is an important step in the process of starting an LLC. The financial activities of a company, managerial duties, and many other things are regulated with the help of this agreement. It is advisable to prepare it because after doing so, one does not require to follow the default rules specified by the state. There are many more advantages of it, which need to be understood.
Nature of the Agreement
The following points are given due consideration, while preparing this agreement:
- The interests of owner/partners (in case of business partnership) in the company
- Specifications of rights and responsibilities of members
- Allocation of profits and losses among members
- Voting powers being allotted to the members of the company
- Specifications set for taking votes and holding meetings
- Directives regarding management of the limited liability company
- The provisions regarding operations, such as buy-sell and buyout should also be stated. Implications of selling the interests by a member, death of members, and other matters are also documented.
The major benefit of having this agreement is that the limited liability status of the owner and all the partners is guarded. Without it, a single-owner company attains a form of sole proprietorship. A formal document, such as an operating agreement, gives more credibility to the company.
A typical format or template of an operating agreement should include the following points
1. Heading: It contains names of the state and business entity.
2. Introduction: A short introduction of the company is provided in this section. Name of the company’s owners, date of establishment, and other important things need to be presented in a precise manner.
3. Articles: The third section should provide details about company formation. Important points regarding the company are specified in it. Details such as name of the company, registered office, agent, name of the owners, and percentage of ownership should be incorporated. This information forms the first half of articles section to be written.
4. Articles (In-depth Information): The different parts of this section should give information about the term, principal place of business, business purpose, records, and admission of additional members. It forms the fourth section of the template.
All the aforementioned points should be covered, while preparing the agreement document.