Business is not just about deals. For your company to flourish, you need to keep it running every day by making decisions quickly and adapting to change.
If you are planning to start an LLC or are already conducting business, you may have heard of an Operating Agreement. This document is not required in most states, but lawyers and experienced entrepreneurs insist on having one. Why? What is this document and its role? In this guide, we will answer these questions.
Operating Agreement is a document that establishes such important aspects of the company’s activities as:
Most states do not require to create this document. However, having one is essential for the stable existence of the company.
First-time entrepreneurs often confuse the Articles of Organization with the Operating Agreement, which are two completely different documents.
The Operating Agreement is an internal document of the company. It does not have a legal nature like the Articles of Organization, therefore it is not subject to registration and does not require to pay any state fees.
An LLC can be founded by a single or a number of owners. Depending on this, this document will be slightly different.
If an LLC has two or more members, you must indicate in the official paper how it will be managed. There are two options available:
At first glance, drafting an Operating Agreement for a single-member LLC may seem like a waste of time, but it is not. You will never have a management disagreement with yourself, but this document is not limited to management only.
It covers such important points as:
In addition, the structure of your single-member LLC may become more complex in the future by joining new members, so you should not neglect the Operating Agreement.
Regardless of whether you decide to start a multi-member or single-member LLC, putting an Operating Agreement gives the company benefits like:
Because it is an internal and optional document, the state does not provide an official Operating Agreement form. Nevertheless, drafting an effective agreement is not as difficult as it might seem at first glance. Its volume and structure are totally determined by the needs of the business and the preferences of its owners.
Of course, every Operating Agreement is unique as well as the business. However, there are a few basic points that should be settled in this document:
In this part you need to compare the two types of management of your company, Member-Managed LLC vs. Manager-Managed LLC. Once you have considered the advantages and disadvantages of all of them, you can determine who will be in charge of the day-to-day work of the LLC, the owners or the managers.
When choosing a member-managed structure, do not forget to clarify such details as:
If you want professionals to take care of your company, then you should provide in the agreement:
Although an LLC provides protection to its owners, they can sometimes be liable for the actions of their partners. Considering this, it is a good idea to include an indemnification clause in the Operating Agreement.
Since the volume and content of the Operating Agreement is unlimited, you can also include a number of additional points such as:
Pay attention to the fact that the rules established in the Operating Agreement must not contradict the law. For example, if you try to state that your company should not comply with the requirement to provide annual reports, these rules will not be legally binding.
As a rule, most companies prepare an Operating Agreement at the formation stage. However, with the prior approval of the other co-owners, you can draft it at any time.
Depending on your preferences and budget, there are several different ways to write an Operating Agreement LLC:
Although hiring an attorney is the most expensive option, it guarantees you a high-quality, carefully prepared document. A professional attorney will help you understand the specifics of the business and state law to prevent most situations that may arise in the future.
Some specialists work at a flat rate, while others charge by the hour. You can also hire a lawyer to check and correct the text of the agreement. The cost of attorney service usually depends on their location, experience and skills and range from a few hundred to a thousand dollars.
Compared to hiring a lawyer, online professional services can save your money and provide high-quality results. When you purchase an LLC formation package, some services also offer customized templates.
Using a template from the Internet is free. However, most of them have one thing in common – the lack of uniqueness. They are focused on a wide range of companies and do not take into account the specifics and business goals of each company.
Every option has its advantages and disadvantages. No matter which one you choose, but it is important to change an Operating Agreement on time.
Since an Operating Agreement is an internal company document, there are no difficulties in amending it. If you foresaw that in this document, just follow the pre-designed procedure. If your document does not have that clause, then you have to follow state legislation.
The first thing you should do to keep your Operating Agreement up to date is to draft the amendment and put it in the written document. Be sure to make the wording as clear as possible to avoid possible ambiguities.
The next step is for the members to approve the changes. This involves printing the new Operating Agreement and sending its copy to each of the LLC owners for approval. Depending on the state, it may be a majority or unanimous vote.
As soon as the owners sign the Operating Agreement, it becomes effective. You don’t need to send this document to a specialized state agency for registration. Instead, you should simply keep it with the other papers.
So we have covered the key points regarding the Operating Agreement, including its content and purpose. Although this document is not mandatory in most states, the advantages of having this legal paper for LLC are obvious. It is an important document, required for both single-member and multi-member LLCs. To provide a stable running and steady growth of the business, you need to take care of the Operating Agreement preparation during the LLC formation process.
The Operating Agreement does not include any official requirements besides signatures of the LLC members, but you have to be very careful about its preparation. This has a direct impact on the quality and effectiveness of the document and, consequently, on the work of the LLC. If you have any doubts about drafting it, consult a lawyer or registered agent to get the most out of it.