What is an Operating Agreement?
An LLC Operating Agreement is the primary contract among the members of a LLC that governs the membership, management, operation and distribution of any income of the company. It is similar to a corporations Bylaws. An Operating Agreement should be in place directly after the LLC becomes active. If you would like to learn more about LLC Operating Agreements, click here: LLC Operating Agreements.
The operating agreement is similar to a Partnership Agreement for a general partnership, a Limited Partnership (LP) or a Limited Liability Partnership (LLP) or the By-Laws of a corporation. It is an internal contract amongst the members/owners of the LLC, and it lays out such things as ownership interest, member responsibilities, accounting method, conditions for adding or removing members, terms for concluding the LLC, etc. It is generally not required by a given state for forming an LLC, although it is certainly recommended to be prepared as soon as possible after forming the LLC. When dealing with banks and other private companies for financing issues (loans, mortgages, etc.) it will likely be required by that institution or company. To validly complete the formation of the LLC, members must enter into an Operating Agreement. This Operating Agreement may come into existence either before or after the filing of the Articles of Organization and may be either oral or in writing.
An Operating Agreement is similar to a combination of a corporation’s Bylaws and a Shareholder’s Agreement in that it deals with the operations of the LLC and the relationship between the owners. The Operating Agreement sets forth the details regarding how the business will be managed and operated. State Statutes typically give members wide latitude in deciding for themselves the rules that will govern their organization.
An operating agreement is a formal document that sets forth the basic understanding by and among LLC owners as to how the LLC will exist, be managed and be run. It’s an internal compilation of issues agreed to by all the members of the LLC. It is not required by law that your LLC have an operating agreement, but it is a sound business practice to have such an agreement in place to avoid confusion and problems. An operating agreement usually sets forth the names of the members and their corresponding ownership percentages, what is expected of each member or manager as far as business conduct and performance, procedures for transferring ownership interests or assigning profits and losses, terms for adding or removing members, and conditions under which the LLC may be dissolved. Any other point of concern as far as LLC operation or existence may be included in the agreement.
