Easily create an LLC operating agreement

An operating agreement is a document that helps protect the owner’s personal assets from the actions of the LLC, clearly outlines which actions are acceptable for the business, and creates a succession plan should the owner exit the business.

Guarding the ‘LL’ in ‘LLC’

The reason you formed a limited liability company instead of a sole proprietorship was likely to protect your personal assets and keep them separate from your business.

However, without an LLC operating agreement in place, the courts may treat your LLC like a sole proprietorship. This puts your personal savings in jeopardy. The formality of an operating agreement legitimizes your LLC for legal purposes.

Avoid misunderstandings

A lot of people go into business with their friends or family, so they aren’t as guarded as they would be with other business partners. But if you want those friends and family to remain friends and family, you should put things in black and white.

Who is expected to do what? Who’s in charge of what? Who votes on who’s in charge of what? How are profits divided? What if one of the LLC decides to sell his portion of the LLC to that guy with the unibrow who used to bully you in junior high?

Spelling issues like this out at the beginning spares you from a lot of “but I thought” and “but you said” and “what I meant was…”

Have it your way

One perk of having an LLC instead of a corporation is the flexibility it gives you. With an LLC operating agreement, you can use that flexibility to decide how you want to profit and the ownership structure. Say one partner puts in only 10% of the initial investment and the other puts in 90%. Maybe the majority owner is willing to take only 50% of the LLC profits in exchange for having a greater say in the management or having to do less work in the daily operation of the company. You can set these rules up however you want them in your operating agreement.

Don’t go ‘by default’

Without an LLC operating agreement, you will, by default, be subject to whatever your state’s rules for LLCs are. While these rules vary from state to state, there’s a good chance you won’t be 100% happy with them.

If you put up 80% of the capital for your hair styling LLC and Barb and Alice only put in 10% each and refuse to work Sundays, you’ll be displeased when you have to dissolve the LLC and the state says you must split the assets evenly with them.

It’s not just the government

Even if your state doesn’t need to see your LLC operating agreement, others likely will. Most banks want to see your LLC’s operating agreement before they’ll let you open a business bank account. Potential investors or partners will want to see it. Financial and legal professionals may want to see the agreement when rendering any advice or assistance. And, if you’re buying real estate for your LLC, you can expect the title company to want to read your operating agreement, too.

Yes, even single-member LLCs

“It’s just me in this LLC! Why do I need an agreement with myself?” you might say. Well, this isn’t an agreement with yourself, like a diet, a New Year’s resolution, or a vow to never attempt to make fish tacos again.

This is a document that says you’re a real business, even if that business consists solely of yourself. As we said, having the document helps establish to the courts that your business is a separate entity from you (and protects your personal assets from your business’s liabilities).

Also, consider that an LLC operating agreement is something that you might want to show to potential investors and business partners. It puts a plan in place for succession if you die or become incapacitated. But creating an LLC operating agreement also helps you to really focus and think about your plan for the company and how you’ll deal with various scenarios if they arise. It gets you in the mindset to run a business.

We can help!

The flexibility of an LLC gives you a lot of choices, and choices are daunting. With so many potential elements to include in an operating agreement, you may want some guidance. Our operating agreement template is a good starting point.

Articles of Organization, also referred to as a Certificate of Formation in several states, is a legal document that establishes the existence of an LLC with the state. As required by state laws, you must file the Articles as part of the LLC formation process.
An Operating Agreement, on the contrary, is not required to be filed with the state. However, this doesn’t diminish its significance in the formation process. Moreover, it becomes a more important document in the life of an LLC because it sets important LLC governance rules. If set properly these rules help streamline relationships and formal interactions between the LLC members moving forward.

LLC operating agreements are used to:

• Protect an LLC’s limited liability status
• Clarify operational conditions, member roles, and responsibilities
• Lay out the rules for your business (otherwise, they will default to your state’s rules)

The requirements surrounding operating agreements depend on the state in which your LLC was formed. Many states do not require LLC operating agreements, however, you will need one for the reasons mentioned above (to protect your limited liability status, set out the rules for your business, etc).

A few of the details your LLC operating agreement should include are:

• Member ownership percentages
• Voting rights and responsibilities
• Responsibilities, powers, and duties of members/owners/managers
• Allocation of profits and losses
• Transfer of ownership rules (in the event the owner dies, sells, etc.)

In short, yes. Anyone forming a limited liability company (LLC) should draft an operating agreement. As we covered above, an operating agreement helps separate your personal assets from your company’s liabilities and debts. Without an operating agreement, the courts may treat your LLC like a sole proprietorship. Furthermore, this document helps dictate LLC member responsibilities, ownership structure, and capital allocation. Even if you’re a single-member LLC, you need an operating agreement to establish your company as a legal business and separate your personal assets and liabilities from your business’s.