Is your business entity formation a limited liability company (LLC)? If yes, you may be considering drafting an LLC operating agreement.
An LLC operating agreement is a contract which clearly defines how the business operates. It also determines which members govern the business.
While an LLC operating agreement is not required in every state, it is recommended every LLC drafts this document. This agreement will guide the LLC and describe the general functions of the LLC’s members, voting formalities, allocation of profit and loss, and special tax classifications.
Here’s how to draft an LLC operating agreement.
Ownership
Some LLCs decide to form one of three LLC structures. These include single member LLC, member managed LLC, and manager managed LLC. Note which LLC structure your company is operating as in this document.
Then, determine the portion of the LLC’s profits, losses, and assets for each member. This may be divided based on initial investment. For example, let’s say one member runs the LLC as a single member LLC. They receive 100% of everything. If there are two members who invested the same amount into the LLC, the amount is split on a 50/50 basis. Ownership rights should be discussed with all members. This ensures everyone understands how these profits, losses, and assets are divided.
Rights and Responsibilities
An LLC operating agreement outlines the daily duties of each member. This may sound like a basic area to cover, but it is important. Each member should know their responsibilities.
This ensures a general understanding in how much of a say each person has in making business decisions. It also helps to resolve any conflicts or disputes within the LLC.
Joining and Exiting the LLC
What happens if the business wants a new member to join the LLC? An LLC operating agreement plans by outlining rules for gaining and losing LLC members.
What will new members receive for joining the LLC? What should their initial investment look like? Take similar guidelines into consideration for departing members. What will they be entitled to? How long should they remain involved with the business? Review this section with any other members of the LLC. This ensures they understand the guidelines and can offer their feedback.
Dissolution
An LLC may dissolve its business for many reasons. The passing of a member could lead an LLC’s dissolution. Or the business may dissolve because it has simply run its course.
An LLC operating agreement outlines terms for dissolution. These terms include guidelines for how to divide remaining assets once the LLC’s debts are paid and rules for whether former members may start or run businesses based on the idea of the dissolved LLC.
Severability Provision
An LLC operating agreement should have a severability provision.
This is standard legal boilerplate. It will say, if a provision of the operating agreement runs contrary to state or federal law, all other aspects which are not contrary to the law should still survive. Otherwise, a small legal oversight could be enough to invalidate the entire agreement.
Draft an LLC operating agreement today. Contact MyCorporation at mycorporation.com or give us a call at 877-692-6772.