Why You Should Have an Operating Agreement for Your Business
If you start a limited liability company (LLC), you need to create an Operating Agreement with your partners. This document protects all members by specifying ownership percentages, rights and responsibilities of each partner. Here are more details to consider regarding an LLC Operating Agreement.
Importance of an Operating Agreement
Although in several states it is optional to have an LLC Operating Agreement, it's still worth your time to put one together. First, check with your state to see if it's required. Even if it's not and you're the sole owner of the company, it's wise to implement one for the following reasons:
- protects your LLC status in case you face a legal action
- clarifies financial and management roles
- defines business structure
- ensures that your business follows its own governance vs state default rules
- determines each partner's share of profits or losses
- explains what happens if a member leaves the company
Operating Agreement Components
Each LLC writes its own customized Operating Agreement, which is shaped by state laws and what partners agree upon. It's common to include details that pertain to earnings and voting rights for each member. It also lays out fundamentals as to how the LLC is managed, particularly regarding rules for meetings. You should determine during the company's formation what happens to the LLC if a member dies, becomes disabled or decides to leave the firm. In some states the departure of any member means the company must close or reorganize.
An LLC is a business structure that works best when it's backed by an Operating Agreement that defines how the company operates and what is expected of each member, along with how and when earnings are distributed. Failing to create such an agreement can lead to misunderstandings. LLC members should also agree on a company vision and exit plan.
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