An operating agreement is a legal document crafted for the partners of an LLC. It governs the operating responsibilities of the LLC. It is often required by state law.

One of the most attractive features on an LLC is that it limits the personal liability of its partners or members. But that means the members must create a framework for the LLC so that it no longer resembles a sole proprietorship or a simple partnership – chief among those framework elements is the operating agreement.

Because the form of the operating agreement is often governed by the state, you will need to refer to the website of the secretary of state where those specifics are laid out. The following is a list of topics that are typically covered in the operating agreement.

  • Member ownership details – In this section the percentage of ownership for each member will be specified.
  • Voting rights and responsibilities – If not otherwise addressed, the voting rights would be governed by the ownership percentage. The operating agreement can specify changes to that norm.
  • Powers and duties on members and managers – Each member has their own roles and responsibilities and is accountable to the other members. In this section those expectations are detailed.
  • Distribution of profits – While distribution of profits usually tracks the ownership percentage, there may be circumstances that would allow for another basis to distribute profits. Those details would be addressed in this section.
  • Scheduling and attending meetings
  • Procedures for transferring membership – This is an extremely important section. Rules governing the sale and transfer of member ownership are generally quite strict rules because members would typically do not want to allow ownership of their company by people they do not know or do not approve of. In this section, questions like what happens in the event of death; what buyout options there are in the event of business failure are addressed.

In most startups, there is excitement. Everybody involved is motivated to do whatever they can to make the company successful. Spirits are high, the mood is positive and there is a lot of emotional energy. While things are running smoothly, members will probably not even refer to the operating agreement. Everyone is getting along so well, why would they?

That’s not really what operating agreements are for. Operating Agreements are for when things are no longer running smoothly. When there are lapses in judgment or at least a problem with a member’s performance – that is when you need the operating agreement. But you cannot write it at the time you need it. You must craft and agree to the Operating Agreement in the beginning when the last thing on your mind is either the failure of its members to perform, or the death of a partner, or the necessity to buyout a member. At that point, you need this detailed agreement to facilitate an orderly transition.

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One Comment
  1. Steven Lowry July 29, 2015 at 8:58 pm

    Great article. Loved it!

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