What is an Operating Agreement?
An Operating Agreement is a contract among members of a limited liability company (commonly known as an LLC) governing the membership, management, rights, duties, operation, capital contributions, voting rights, transfer of interest, dissolution and distribution of income of the company. Operating Agreement are similar to a corporation’s bylaws. Definition of Operating Agreement.
An Operating Agreement is an agreement between the Members (owners) of a Limited Liability Company. The Operating Agreement governs the operation of the LLC and defines the rights and obligations of the Members to each other and to the LLC. It is similar in function to a Partnership Agreement. The LLC Operating Agreement is not the document you file when creating an LLC. The filing document for an LLC is called the Articles of Organization.
An operating agreement describes how the LLC will operate and how LLc members will work with each other and with the LLC. In most states, you technically don’t need an operating agreement in order to form or run an LLC. But an operating agreement maybe required in some states and by banks. If you’re setting up an LLC with multiple members, you should either get a simple boilerplate operating agreement, oftentimes, you can buy one from an online legal forms site for a few dollars, Or you should confer with a local attorney and have him or her write up an operating agreement that’s specific to your situation. One other comment about operating agreements: If you’re setting up an LLC primarily for legal reasons (rather than just for tax reasons), you probably want to get an operating agreement. Especially in the case of single member LLCs, having and honoring an operating agreement is thought to strengthen the liability protection.
The operating agreement is akin to a partnership agreement for a General Partnership or Limited Liability Partnership (LLP). 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, adding or removing members, terms for concluding the LLC, etc. It is generally not required by a given state for forming an LLC (with the exception of New York), although it is certainly recommended. When dealing with private companies for financing issues (loans, mortgages, etc.) it may be required by that company. A customizable operating agreement is included with the LLC/Corp Kit.
