Basics of an Operating Agreement

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7-20-1Here’s an indisputable fact: An Operating Agreement is THE most important document you’ll ever prepare for your LLC. No other document is as important to your LLC’s operation. It needs to be accurate, it needs to be complete, and it needs to set out what you want it to say.

With a bad, incomplete or incorrect Operating Agreement, you’re potentially exposed to liability, increased IRS scrutiny, and more.

With no Operating Agreement you’re at the mercy of state law. Most state LLC laws say that they will defer to an LLC’s Operating Agreement, assuming there is one. But where no Operating Agreement has been prepared, state laws will apply. This can have some negative consequences, particularly if you had some special planning, such as distributing profits outside a strict ownership percentage. State law won’t let you do that.

A properly drafted and signed Operating Agreement can help to preserve your LLC’s liability shield. It is a piece of evidence demonstrating that you intended to create a true business and are operating as a true business.

Here are some of the key points you’ll need to address in your LLC’s Operating Agreement (in addition to other administrative functions):

  • Whether the LLC is member-managed, manager-managed or managed by a select group of members
  • Whether or not the LLC chooses to use traditional management titles such as President, Secretary, etc
  • How managers or managing members are appointed or removed
  • The duties and responsibilities of the members or managers
  • Restrictions on ownership and transfer of membership interests
  • How the profits and losses are to be distributed amongst the members
  • What happens in the event of the LLC’s bankruptcy
  • The circumstances under which a member may voluntarily leave the LLC
  • The circumstances under which a member may be bought out by other members, voluntarily or involuntarily
  • How disputes between managers, members or both are resolved
  • The level of control managers have over day-to-day operations of the LLC, and when management actions will require pre-approval by the members
  • How the Operating Agreement may be changed
  • How members may leave and join the LLC
  • When an LLC may ask its members for additional cash or property contributions, and what happens when members cannot or refuse to pay

I’ve just spent the last week reviewing documents and agreements as we get set for our July 24th seminar on LLCs and Operating Agreements. I’m looking forward to sharing the tricks and secrets to help you create a solid document that will protect you now and into the future.

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