Operating Agreement – The LLC’s Governing Document
Many states do not require you to have an operating agreement for your LLC, but having one is for your protection, especially when there are 2 or more owners. In this article, we will address what an operating agreement is, why your LLC needs one, and what to include in your operating agreement.
What is an Operating Agreement?
An operating agreement for an LLC is the governing document (i.e. the document you write to set the rules for the business). The operating agreement will list who the owners are, what are their rights and responsibilities, how the LLC is managed (who is in charge), how it will be taxed, etc. The operating agreement will establish the percentage each member owns and the respective shares of the profits (or losses). It also outlines what happens if a member wants or needs to leave the LLC. You do not need to file the operating agreement with the state, just keep it for your records.
Why your LLC needs an Operating Agreement
Writing an operating agreement for your LLC provides protection for your business. If you are sued or audited, it clearly defines how your business is operating and how it will be handled. It makes sure your business operates by your rules, and not the rules created by the state in case of a misunderstanding with your co-owner(s). Many states, for example, have “default” rules that you may not like. Don’t let the state dictate how the LLC is operated, create and sign an operating agreement that meets your needs. California, Delaware, New York, Missouri, and Maine require LLCs to have an operating agreement.
What to include in your Operating Agreement
Operating agreements typically include the following:
- who the owners are and what are their rights and responsibilities
- how the LLC will be managed (who is in charge)
- how the LLC will be taxed
- each members’ percentage interest in the LLC and their share of the profits or losses
- rules for holding meetings or taking votes
- what happens when a member wants or needs to sell his or her interest, or if a person wants to join the LLC