An operating agreement is a document that outlines the ownership structure, management, and operations of a limited liability company (LLC). While operating agreements are not required, we highly recommend them for all LLCs with more than one owner (owners are called Members in the LLC context). You may have also heard it called an LLC Agreement or a Founders' Agreement.
An operating agreement can help to protect the members by clearly setting out the LLC's ownership structure, management, management duties, decision-making responsibilities, and operations. This can help to avoid any disputes or misunderstandings that could arise down the road.
If a business does not have an operating agreement, the default rules from state statute apply. These default laws may not be in the best interests of the members, and will not reflect their "handshake" understanding of their relationship.
An operating agreement clarifies the rights and responsibilities of the members of the LLC. This is crucial for multi-member LLCs, where there may be different expectations about how the business should be run. An operating agreement can cover a wide range of topics, including:
- The members' ownership percentages;
- The members' roles and responsibilities in the management of the business;
- How day-to-day, and especially important decisions are made;
- How profits and losses will be distributed;
- How new members will be admitted to the LLC; and
- What happens in the event of a member's death or desire to leave the business.
By having these issues clearly outlined in an operating agreement, the members of the LLC will have a roadmap on how to work through disputes or misunderstandings that could arise down the road. This is especially important for LLCs that are planning to grow and expand, especially by bringing in investors. By having these issues addressed in advance, the members of the LLC can ensure that the business continues to operate smoothly, even if there are changes in the membership.
It is important to enter into an operating agreement *before* problems arise, so we recommend doing so as the next step after forming your LLC with the state. We can help founders work through the issues and create a quality agreement that reflects their understanding.
Let us know if you are ready to get started on this important step!
