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What is an LLC Operating Agreement?

LLC stands for limited liability company. With an LLC operating agreement, you and your co-owners can set up clear financial and management structures to suit your business. The agreement includes ownership percentages for each co-owner, the amount of each co-owner’s share of the profits or losses, and the rights and responsibilities of each co-owner. The LLC operating agreement also defines what happens to the business if someone leaves.

Does My LLC Need an Operating Agreement?

In the state of California, LLCs must have operating agreements even if you are the sole owner of your company. Operating agreements allow you to set your business operation rules and preserve your status as an LLC. If you are the sole owner of your company, your business can be perceived by the courts as a sole proprietorship. With an LLC operating agreement, the courts will recognize your limited personal liability in the company.

What Should LLC Operating Agreements Include?

Your LLC operating agreement should clearly state how the profits and losses will be distributed. It should also list the percentages of the company that each person owns. Although in most businesses, the percentage of the company that a member owns is equal to the rate that an individual invested at start up, an operating agreement allows the co-owners to distribute company ownership percentages however they wish.

In most cases, profits and losses are distributed to LLC owners based on the business percentages they own. If you own 50 percent of an LLC, you would typically get 50 percent of the business’s profits and losses. If you want to distribute profits and losses differently, you will have to include what’s called “special allocations” in your operating statement.

Other items to include in your LLC operating agreement include:

o Rules for meetings and voting
o What happens when members sell their ownership percentages
o What happens when members die or become disabled
o What percentage of the allocated profits will be paid out to co-owners
o What percentage of the allocated profits will be reinvested in the company
o Whether co-owners will be paid enough to cover the taxes on their allocated profits

Creating Your LLC Operating Agreement

Getting a business lawyer to set up your LLC operating agreement is a good idea if you and your co-owners want to create special allocations of profits and losses. On the other hand, if your LLC operating agreement will be relatively straightforward, you might prefer to set it up yourself.

Always measure the cost of a business attorney against the potential costs for you and your business partners if you make a mistake. If you decide to create your LLC operating agreement, you might wish to retain a business formation lawyer to review your work and ensure that you’ve covered all the angles. Hiring an experienced business lawyer as a consultant is a cost-effective way to get legal assistance on an as-needed basis. Feel free to contact our skilled attorneys or browse our website for more information.

By | 2015-02-28T10:19:38+00:00 February 28th, 2015|Business Formation, Business Law, LLCs|Comments Off on What is an LLC Operating Agreement?