Create an LLC Operating Agreement: Facts you Need to Know

One of the essential elements of a limited liability company or LLC is the creation of an LLC Operating Agreement. Although other states do not require LLC owners to have an operating agreement, it is still recommended that you have one for your LLC. For what reason, continue reading and learn more about the LLC Operating Agreement.

Just like the bylaws in a corporation, an LLC Operating Agreement is the governing principles that make an efficient LLC management and business operation. It allows you to plan your financial and working aspects of the company with your co-owners in a way that will suit all your preferences. In the operating agreement, you and your co-owners will decide on the percentage of ownership, the share of profits, and the rights and obligations of each individual owner of the LLC.

In addition, it also helps your LLC providing you your limited liability status, shedding away from financial and management misunderstandings, and giving you the sole right of having your business be governed by your own rules and not by the rules of the state which has jurisdictions over your business.

Limited Personal Liability

Having an LLC operating agreement guarantees you that the court will respect your limited personal liability status. It will serve as a proof that your business is operating as an LLC especially on cases of LLC of single ownership. The lack of an operating agreement on this case will make your LLC look like a sole proprietorship. Remember that in a single proprietorship, both the corporate and personal assets of the owner are at risk.

Financial and Management Misunderstandings

LLCs with multiple owners needs a formal documentation with regards on profit-sharing and decision-making protocols as well as with regards to the standard operating procedure of handling departure, addition, and transfer of ownership of the LLC owners. Without a formal operating agreement, you and your co-owners will have difficulty in settling misunderstandings over the financial and managerial aspects of the business. In addition, it will be subjected to the rules of your state, in contrast on the purpose of an LLC to provide flexibility for its owners.

Be Govern by your Own Rules

Each state has specific laws that govern the creation and operation of LLCs within their territories unless your LLC’s operating agreement declares otherwise. For instance, most states have a default rule on the distribution of profits and losses in equilibrium. In case you and the rest of the owners of the LLC did not invest equal capitals in the LLC, you need not to divide the profits equally among yourselves. It will be avoided by specifying in the operating agreement how these profits and losses are allocated among yourselves.

Details in your LLC Operating Agreement

What are the particular details you need to include in your operating agreement? Most LLCs includes the following items in their written agreement:

1. the owner’s percentage of interests inside the LLC,
2. the owner’s rights and obligations,
3. the owner’s voting interests,
4. terms and conditions in allocating profits and losses in the LLC,
5. how the LLC will be managed,
6. rules and regulation in holding meetings and the voting rights thereof, and
7. other financial matters pertaining to the interests of all the owners of the LLC (that is, provisions in case an owner decided to leave the consortium and sell his ownership interest or dies).

Creating an LLC operating agreement is essential even it is not considered to be requirement. Remember that you choose to operate your business under LLC to provide you stability and personal protection.

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