What Is the Agreement About?
An Operating Agreement is an internal business contract between the member(s) of the LLC which outlines how the business will be governed.
Note: The agreement is specifically used for LLCs. This agreement is similar to the by-laws of a corporation or partnership agreement.
- Highlights the rights, voting power, responsibilities, and obligation of each member or manager towards the firm.
- Lists out the terms and condition agreed by the member(s) of the LLC.
- Covers how disputes will be resolved. Example what happens when any of the member does not fulfill his duties or what happens why any of the member decides to leave the firm.
- This agreement act as an ultimate blueprint which can help resolve any possible issue/conflict which may arise in the future. It also reduces the confusion between the member(s) and eases out the business operation.
Why is it Required?
While most of the states in US do not require a written operating agreement but without it, your business may be prone to confusion, and disputes. And in the worst case, it could lead to waiving off the limited liability of your LLC.
In business, there could be disagreements or financial disputes between the member(s). Provision to handle such disputes can be made in the agreement thus saving lengthy and costly legal route.
At the same time without the operating agreement, such cases would get governed by the default LLC statutes of the state. The default statutes are applicable for LLCs, which do not have the operating agreement drafted or the agreement does not address all the scenarios.
In cases like these, the default state statutes become the binding authority.
The default LLC statues would mostly do you more harm than good as it does not take into account factors like capital contribution, voting rights etc.
Also, not having an operating agreement indicates that business was not professional enough to complete all the business formalities. When such businesses are sued, the court may not uphold the limited liability status of the LLC. In legal terms, this is known as piercing the corporate veil.
LLC Operating Agreement Template
Now that you know the importance of this document, you’d be wonder I need to get one immediately.
Well, we’ve made it easy for you. Download sample operating agreement template, specific to your state below.
We’ve spent countless hours to develop these templates so that you can smoothly run your business.
- Note #1: States in which the agreement is mandatory are marked in bold.
- Note #2: These are generic templates. Make sure you edit them as per your requirement.
- Note #3: When in doubt, consult an attorney.
Important Points that Must be Added in Operating Agreement?
Broadly, the agreement should cover the following fundamental points:
- Rights, responsibilities, and expectation from each member
- Percentage Ownership of Member(s)
- Capital contribution and how profit/loss/expenses are divided
- Voting rights
- Tax information and accounting method used
- Provision to add/remove any member
- In case of death of any member, how the business will be impacted
- How buyout/buy-sell of membership interest will be handled
- Business liquidation rules
- Non compete clause
Does the agreement need to be filed anywhere?
Unlike article of formation/incorporation, the agreement need not be filed anywhere. Neither does it require to be notarized. For the document to be effective, it must be signed by all the member(s) of the LLC.
The agreement should be kept at the principal office along with the other business documents. And each member should be given the copy of the document.
To summarize, an Operating Agreement is one of the most important but often overlooked document for your LLC. We highly encourage every LLC to have one.
Last Updated: 30/11/2018