When starting a Limited Liability Company, it’s essential to create an LLC Operating Agreement. This not only explains the workings of your company, but it also works to separate the business owner’s finances from the company and protects them against liability claims.
In simple terms, a limited liability company blends the features of a traditional corporation and a partnership. It gives the business owner better liability protection than just individual ownership, and it is much simpler to manage.
This is a legally binding document for businesses that outlines how the company will be managed, the structure of the business, its day to day operations, members and their percentage of ownership, and gives instructions regarding what is to be done if the LLC goes out of business. There are two types of LLC Operating Agreements; a Single-Member Operating Agreement and a Multi-Member Operating Agreement.
The Single-Member Operating Agreement is used for a business that has one sole owner. The Multi-Member Operating Agreement is used for an LLC with more than one member and can be a bit more complicated. It doesn’t need to be submitted to a government office. It is an internal document for your company’s record-keeping.
What Should be Included?
There are some key things that you should have on an LLC Operating Agreement, for both Single-Member and Multi-Member businesses.
- Business purpose
- The names of all members and their signatures
- The interest percentage of each member, as well as any financial contributions they have made towards the company
- The date of annual meetings (if applicable)
Depending on whether you are a Single-Member LLC or a Multi-Member LLC, there will be other areas that you should outline.
Having a Registered Agent
Most states in the U.S require LLCs to appoint a registered agent. This is an individual that you designate as the recipient for any official documents for the business. If a state requires you to have a registered agent and you don’t appoint one, you may incur a penalty or have the industry prohibited from operating.
It’s essential to include some financial aspects in your LLC Operating Agreement, regardless of whether you are a single-member or multi-member LLC. The purpose of this is to make a clear differentiation between your finances and that of the business. For an SMLLC, you will need to show how much you have put into the business financially, as well as outlining how you will be paying yourself a wage. It is essential if you will be seeking investors for your company, as well as when you need to file taxes.
For an MMLLC, you will need to outline how the business will be paying its taxes, how it will handle profits and losses, how much the business owner will be putting towards the company, and how profits will be distributed to any members.
Dissolving The Business
For both SMLLC and MMLLC business, you should have a clear outline regarding what should be done should you decide to dissolve or close the business. This will be important if you should be unable to run the business or pass away, and you want other family members to take over. It should also outline how assets should be distributed should the business be dissolved.
Officers and Members
Both LLC types should outline any officers or managers that have been appointed to take responsibility for different areas of the business. For an MMLLC, any new members or members who have left should be updated on the operating agreement, along with their ownership percentage.
Your LLC Operating Agreement is flexible and can be as simple or complex as you want it to be. With an LLC, the business is not taxed. The members pay a share of the taxes that are based on any personal income. Also, members of an LLC won’t be held liable for the business’s debts or any liabilities.
Who Would Need to See an LLC Operating Agreement?
There are instances when you will need to present your LLC Operating Agreement to someone outside of the business. People who will need to see the operating agreement include:
- Lenders if you are seeking financing
- Any title companies, if you are making real estate purchases for the business
- Tax and accounting professionals if you seek financial advice
- Lawyers if you are seeking legal advice
- Any potential investor should you find funding
- A court, should you be in a legal battle
Laws around LLC Operating Agreements
As mentioned earlier, having an LLC Operating Agreement is a critical way to protect yourself legally. If the business were to get pulled into a legal battle, for example, and you didn’t have an operating agreement, the courts could go after personal assets.
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Templates (by State)
Frequently Asked Questions
Some states do require a business to have an operating agreement. Whether your state requires it or not, it is beneficial to have one in place as a means of protecting yourself against liability.
The role of a registered agent is to take care of documents, correspondence, and communication on behalf of the business. They will need to have a registered address in the state that the LLC operates in. Some states allow the names of LLC members to be kept secret from the public and just use the name of the registered agent.