What is an Operating Agreement?

You are not required to include any specific provisions in your operating agreement. You can put in any provisions that you want, as long as they are not contrary to law. You should work with an attorney to discuss the unique needs of your LLC, but common provisions in Phoenix operating agreements include:

• Percentage of membership ownership and contributions. Most often, the percentage of ownership is based on the capital contributions each individual provides. However, you could also take into consideration the amount of work that each member puts into the operation of the LLC.
• New members. Many operating agreements include the process for admitting new members into the LLC, including how new members make initial capital contributions and the required contribution amount per member.
• Decision-making. The operating agreement should outline how and when decisions are made, including whether a majority or unanimous consent is required and whether some decisions can be made without seeking the approval of the members. The operating agreement should also include the voting power of each member. Generally, voting power is based on ownership interest in the LLC.
• Powers and duties of members and managers. An LLC can be managed by one or more of the members or by appointed managers. The operating agreement should include how strategic decisions will be made and how the LLC will be run day-in and day-out. All members should understand their responsibilities and the authority that they have to act on behalf of the LLC.
• Distribution of profits and losses. The method and timing of profit and loss distributions should be included in the agreement. For example, you could base distributions on the members’ financial contributions, or you could take into account the different financial needs or tax brackets of the members. The distributions could be at set times, triggered by specific events, or made at the management’s discretion.
• Buyout and buy-sell rules. You should plan for what will happen when a member wants to leave the LLC or dies. For example, will the ownership interest be offered to other members? Can the ownership interest be transferred to a third-party? Does a third-party transfer need approval?
• The operating agreement should include how and when the LLC will be dissolved or ended, including how much each member will get paid based on their ownership percentage or contributions.
• It is prudent to include language that states members have limited liability for their actions as members. This clause can help protect members from personal liability if it appears that they are operating as a sole proprietorship or a partnership.