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Components of an Operating Agreement

All LLCs should have an operating agreement. The form and contents of an operating agreement vary widely, but most will contain six key sections: Organization, Management and Voting, Capital Contributions, Distributions, Membership Changes, and Dissolution.

  1. Ownership. For single-member LLCs, this is simple, since you will be the sole owner and thus have complete control of your company. It should be made clear that you are protected by limited liability from debts or legal action related to your LLC. For multi-member LLCs, you will define who owns what percentage of the company.

  2. Management. For a single-member LLC, your agreement should set out the responsibilities you will have in being the sole manager or what responsibilities you will delegate to any hired managers. You should state if you intend to be the sole manager and who your replacement should be in the event of disability or death. If you don’t, legal complications could arise if your family wants to continue your business or dissolve it. For multi-member LLCs, you will determine whether your LLC will be member or manager managed. Member managed means every member within the LLC will make business decisions. Whereas a manager managed LLC elects a manager to make everyday business decisions and provides for certain cases in which majority of members must agree to proposed changes.

  3. Distributions and contributions. For a single-member LLC, your agreement should state what capital contributions you will be making and, if these contributions are non-monetary, what their monetary value is. It should also state how losses and profits will be distributed to you, as they will be reported on your tax return. For a multi-member LLC, the agreement will state what capital contribution each member made and what the value of contribution is. The agreement will also state how losses and profits are distributed to the members.

  4. General rules. In both single-member and multi-member LLC structures, the basic rules of management for the LLC should be set out here.

  5. Statute differences in Single-Member vs. Multi-Member. For a single-member LLC, your agreement should clearly state that the owner has the authority to act without holding meetings or voting. If you take action without this being stated, you could end up in default, especially if third-parties, such as creditors, are involved. Whereas for multi-member LLCs, provisions for management structure, distributions, and bankruptcy should be addressed which should include meeting and voting provisions.

  6. Dissolution. Although you may hope to never have to deal with this, it is good to have a plan laid out for how to wind down your company, should it be necessary. For single-member LLCs, you will want to look into passing the business to a loved one or a trusted employee. You may also consider selling the business and leaving the cash proceeds to your estate. Whereas with multi-member LLCs, the agreement needs to consider both death and dispute. The agreement should state the procedure required to buy out a member of the LLC as well as what happens if a member of the LLC passes way and how their interest will be handled. In either scenario, the owner or owner of the LLC will want to look into insurance policies specifically made to help facilitate buyouts at one's passing.

Other Topics In addition to these six key sections, operating agreements may address any number of other topics. This depends on circumstances of a particular company. For example, members may wish to include requirements for periodic meetings, restrictions on check signing, or explain how disputes within the company will be handled. Keep in mind that, once you start a business, your operating agreement can be updated at any time through a process of your choice. If you or someone you know is looking for guidance on creating their own operating agreement, please reach out to the The Rose Law Firm for help.

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