Business Major

By: Amy Mcdaniel

The Operating Agreement LLC is the most important document after the formation certificate for an LLC business. In this agreement, ownership is established in the business and this document sets forth the rights and responsibilities of the owners.

This document also puts in place an operational structure which is very important because it states how the business takes actions and operates on a daily basis.

Every member, manager and officer must gain a practical understanding of how the business will be managed. If the specific matters are set forth properly in an operating agreement, everyone will be on the same page and this will prevent later problems and misunderstandings.

The limited liability company laws provide some default rules that apply in the event that an operating agreement is not adopted or one does not address a specific issue. However, it is never recommended that you rely on the default rules of your state. Many of them are not fair and do not make sense in a real business setting.

The better method is for the stakeholders in your business to get together and determine a set of rules that makes the most sense given your particular situation. One great thing is that the law acknowledges that there is no one size fits all solution to how a limited liability company can be operated. As a result, owners have great flexibility to determine what rules and limitations apply to their business.

3 Major Business Issues to Address in an Operating Agreement LLC

While an operating agreement can be very simple or very complex, there are a few matters that should be addressed in every one of them.

The first is to have a clear structure for how the limited liability company is owned. Ownership disputes are one of the most litigated issues in small business. By having proper ownership provisions in the governing documents, these can be avoided.

Second, there should be a clear method of how the LLC business becomes authorized to transaction business. There are two general operational structures, member managed and manager managed. With member managed, the owners, called members, are active in managing the business. With manager managed, there is a separate governing body called a Board of Managers. Owners only have management authority if they are elected to serve as a manager.

After a structure is determined, voting requirements need to be spelled out in the document. Many businesses require that owners holding a majority of the ownership need to approve major business decisions, but this percentage can be higher or lower based on each situation.

Third, an operating agreement LLC should address distributions which is when an LLC is authorized to distribute profits of the business out to its members. This typically requires a vote by the members. However, some businesses will create provisional limitations when it is important for a business to conserve capital to grow or others will require mandatory distributions.

SUMMARY

This Article summarizes only the key provisions. A typical operating agreement is at least 8 pages and can be hundreds of pages for a complex business. Because this document is so essential, this is one area where retaining a business lawyer to draft one is well worth the costs.