Understanding LLC operating agreements
Limited liability is an LLC’s biggest advantage. Establishing an operating agreement ensures that your members are protected within your organization, too. You may not be legally obligated to have an operating agreement for your LLC, but it’s still an important step you should consider. Your operating agreement will be a source of truth for what each owner contributes to the LLC, and it outlines everything from the day-to-day operations of your organization to the inner workings of your chosen management structure. More than anything, your operating agreement protects you in the event of financial or leadership misunderstandings. Example: Let’s say an LLC is made up of three owners and has been active for five years. The owners established an operating agreement early and included how their LLC would be managed, individual voting powers, each owner’s responsibilities and a buyout provision. One of the owners decides to leave the business before their sixth year together. Together, the group refers to their operating agreement to decide how to return the departing owner’s original investment, how to divide responsibilities to the remaining members and how to reassess percentages of ownership. The process is streamlined and effective because the decisions have already been agreed on and documented by all parties.Takeaway
Think of an LLC operating agreement like a detailed dossier for an international trip. It’s helpful to have your flight numbers, hotel contact information and travel insurance policy all handy, even if you don’t think you’ll need to reference them. If you get lost along the way, you can always refer back to the plans you’ve made. Your LLC agreement ensures you’re never without the information you need to make decisions. Your LLC operating agreement will:- Document key info about your organization’s structure
- Hold all of your individual members accountable
- Protect you in the event of financial or leadership changes
- Help guide future decisions as the LLC matures
In more detail
Does my LLC need an operating agreement?
Not all states legally require LLCs to have an operating agreement, but it’s still a good idea to have one. Some states dictate that LLC owners have to split their earnings equally. In this case, having an operating agreement ensures that your LLC is able to define how you’d like to operate without needing to defer to state default regulations. Your operating agreement also lends credibility to your organization.What should be included in an LLC operating agreement?
- Ownership percentages (how much each person owns of the LLC)
- Member voting powers
- Rules for meetings and notes
- How the LLC will be managed
- Profit and loss allocations
- Plans of action if a member leaves
How to make your own LLC operating agreement
There are many free resources available online to develop an LLC operating agreement, but the templates all boil down to these ingredients:- Company details: LLC name, address and date of formation
- Member names and their contact information
- Contributions per member (financial, assets or services)
- Rights and obligations per member
- Leadership or officer details
- Management procedures
- Tax details (when the fiscal year will end)
- Distributive shares (profit and loss allocations)
- Voting policies
- Provisions for dissolution or changes including; member death, inability to perform duties or leaving for other reasons, or dissolving the LLC (how and when)
