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What is an LLC operating agreement?

An operating agreement is a formal document that sets forth the basic understanding by and among LLC owners as to how the Limited Liability Company will exist, be managed and be run. An LLC operating agreement is a legal document that outlines the ownership and management structure of a Limited Liability Company (LLC). The operating agreement is a crucial document for any LLC as it sets out the rules, regulations, and procedures for running the company.

The operating agreement typically includes the following key provisions:

1. Ownership structure: This outlines the percentage of ownership of each member in the LLC.

2. Management structure: This outlines whether the LLC is member-managed or manager-managed, and the roles and responsibilities of the members or managers.

3. Profit and loss allocation: This outlines how profits and losses will be allocated among the members.

4. Voting rights: This outlines the voting rights of each member, including the number of votes required to make decisions and the procedures for voting.

5. Transfer of ownership: This outlines the procedures for transferring ownership interests in the LLC.

6. Dissolution and winding up: This outlines the procedures for dissolving the LLC and winding up its affairs.

The operating agreement is a binding agreement between the members of the LLC and can be customized to meet the specific needs and requirements of the company. While an operating agreement is not required by law in all states, it is strongly recommended that every LLC has one in place to avoid disputes and ensure the smooth operation of the company.

The risk you run by not having an operating agreement in place, in addition to internal confusion, is that your LLC's limited liability status could be placed in jeopardy. Without an operating agreement, your Limited Liability Company could also be forced to operate in accordance with your home state's default operating requirements rather than the way that you as owners would prefer that your company operate. In projects taken on by your LLC in which a good deal of capital or a substantial line of credit is at stake, some lending institutions may require your LLC to have an operating agreement.

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