What Is an LLC Operating Agreement?

Limited liability companies (LLCs) can be a safe and practical business structure. Operating agreements provide stability and are essential to LLC formation. They are like a corporation's bylaws because they guide the business entity and document its status. They are roadmaps for managers and owners to follow.

Not all states require LLCs to have operating agreements. Still, it is better to have one than not. A good operating agreement offers flexibility and can avoid issues down the road.

LLC operating agreements are not filed with the state. Typically, they are stored in a business's minute book for safekeeping.

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Key Takeaways

• While not always required by law, LLC operating agreements help keep everyone on the same page.
• Operating agreements provide LLCs with flexibility in decision-making and structuring.
• There are essential terms that should be included in every LLC operating agreement.

Understanding LLC Operating Agreements

LLC operating agreements are essential legal documents that help keep everyone on the same page. They limit the personal risk for business members and contain details that govern how the LLC operates. This avoids misunderstandings in multi-member LLCs.

If a business falls into debt, a well-written operating agreement will protect members and their personal assets. Should there be a disagreement between members, courts will look to that business's operating agreement to assess each member's initial intentions and their current rights in the company. In this way, operating agreements do the early legwork to avoid confusion or conflict later on.

The Flexibility of LLC Operating Agreements

LLC operating agreements provide business owners with flexibility in structuring their organization. For example, members can decide whether the business will be run by a single member, a panel of members, or a manager.

These documents also allow members to decide on a tax structure for their business.

Essential Parts of an LLC Operating Agreement

Every LLC operating agreement differs depending upon the needs of the business and its members. However, there are a few essential terms in most operating agreements. These include:

• A breakdown of each member's ownership percentage and initial capital contributions
• Each member's rights and decision-making responsibilities
• A detailed plan showing allocation of the LLC's profits and losses
• The voting rights of the members
• A management structure for the business
• Default rules for meetings and voting
• Default rules governing essential business decisions and events, such as the death of a member

Answers to Your Legal Questions

Drafting an operating agreement can be an essential part of an LLC's success. New small business owners often have questions when they start an LLC. It's always best to contact a business lawyer who can guide you through such matters.

Related Terms

• Making LLC Operating Agreements
• LLC Formation
• Buyout Agreements: Changing LLC Ownership
• LLC Member Tax FAQs