What is an Operating Agreement?
An operating agreement refers to a legal document outlining the rules and structural makeup of a limited liability company, or an LLC. The operating agreement recognizes the members of the LLC and lists how any business regarding the LLC will be conducted, such as voting procedures, how the funds will be allocated, and disciplinary mechanisms.
In most states, the law does not require an operating agreement to be filed with the state for an LLC to operate; it’s an internal agreement created to help establish how the LLC will operate. That being said, creating an operating agreement can be a huge benefit to the LLC.
Proof of Ownership
When it comes to questions of ownership, it’s always good to have the deed available.
Because most state laws don’t require an operating agreement for an LLC, the members don’t have to register their names and addresses on the group’s Certificate of Organization. While that may be a relief for anyone who prefers a certain level of anonymity, it can also create problems when establishing ownership of the LLC. A person claiming to be a member could try to conduct financial transactions in the LLC’s name without proper authority.
Since the operating agreement lists the members, it will eliminate questions of business legitimacy and safeguard the LLC’s operational integrity.
Settler of Internal Disputes
Every organization has people, and sometimes those people disagree about how the organization should function. If you’re going to fight, it’s good to have the rules of engagement ready beforehand.
Because the operating agreement includes rules for conducting business, the document can help serve as a guide to settle debates and quickly end disputes. While the contesting parties may not be satisfied with the final outcome of a dispute, they can take some comfort in knowing the problem was handled according to the rules established for the LLC by the operating agreement.
Maintain Liability Status
It’s important to legally separate the LLC entity from the owners to make use of the limited liability protection offered by the LLC.
While this can be accomplished through general steps like keeping LLC spending completely separate from the individual members’ spending, an operating agreement can provide proof of how the LLC should be operating. If the LLC ever gets hit with a lawsuit, the operating agreement can demonstrate how the members conduct business.
Things to Include
Because most states do not require an operating agreement to form an LLC, the rules set forth by an operating agreement can cover anything the founding members want to include.
For example, a transfer of membership interests will explain how a member’s power can be transferred to another when that person leaves. Bookkeeping procedures show how funds get collected and where they get distributed, providing business transparency. Management outlines show the chain of leadership, and voting rights detail how decisions will be made by the members.