When you incorporate a business, it’s smart to put the right documentation in place. Business documents can provide clarity and consistency, ensuring that you and your business partners are always on the same page about how the business is structured. When you launch an LLC in Texas or elsewhere, one of the documents you will need is the LLC operating agreement. While most states do not require you to have an LLC operating agreement in place, doing so can ultimately be an important way to protect your business long-term.
What is an LLC Operating Agreement?
Basically, an LLC operating agreement is a document that outlines the terms of the company, as agreed upon by its members. For example, the operating agreement might summarize the decision-making power within the organization, or give details about the financial structure. In many ways, it is similar to articles of incorporation, which are used for businesses structured as corporations.
Once you and the other business owners have agreed upon and codified your operating terms, you will each sign the document. At this point, the LLC operating agreement becomes a binding set of rules, to which all partners within the business must adhere.
What Should You Include in Your LLC Operating Agreement?
There are many issues that can be covered in an LLC operating agreement. And, because the needs of each LLC are different, there is ample room for customization. With that said, the structure of an LLC operating agreement usually encompasses the following:
- It will express each member or partner’s ownership of the company as a percentage. For example, if you have two partners, the LLC operating agreement might simply note that you each have responsibility for half of the company’s assets and liabilities.
- The operating agreement should also outline the responsibilities and privileges (including voting and decision-making rights) of each member.
- Additionally, an operating agreement should denote how profits and losses are allocated amongst members.
- The operating agreement should provide clarity about when and how often the members are required to have meetings or conduct votes.
- An operating agreement can go further into any of the practical issues associated with the management of the LLC.
- It is also wise to include buyout and sellout provisions, should one member decide they want out of the business, or should a member die.
Additionally, you can use your LLC operating agreement to define other terms used in the business, articulate your goals for the business, and even denote things like where the business operates and how long you plan for it to be active. (Often, the answer will be indefinite!)
Your LLC operating agreement can also be a good place to express how you wish the business to be viewed for purposes of taxation. Note that once you declare your intentions to be taxed as an S-corp (for example) you generally are not allowed to change your tax structure for a few years.
LLC Agreement Templates
Below are professionally crafted templates for you to get a better understanding of the elements and structure of the LLC operating agreement. The templates are free to be downloaded and can be edited as per needs.
Using an LLC Operating Agreement
There are a number of questions that can arise with regard to the practical use of an LLC operating agreement. For example:
If you are the only owner/employee of your LLC, is an operating agreement still needed?
Even if you do not need clarity between different partners, having an operating agreement in place can still be beneficial.
One of the main reasons why business owners choose the LLC structure is that it limits their personal liability, should the company be subject to legal action. With an LLC operating agreement, you can very clearly articulate the legal boundary between your personal assets and the business itself.
Does an operating agreement have anything to do with succession planning?
Yes! In fact, one of the main benefits of having an operating agreement is that it allows you to clearly voice your plans for succession, should you retire from the business or die prematurely. Again, this can be beneficial whether you have partners or are the sole member/owner of the business.
Does an operating agreement take the place of a business plan?
There is certainly no legal requirement to have a business plan for your LLC, and you may decide that just having an operating agreement is sufficient.
With that said, a business plan can be a very helpful way to set business goals, establish core values, and provide a strategy for achieving your long-term objectives. Many business owners will benefit from having both types of documents in place.
Can you use your LLC operating agreement to sell shares in the company?
This is one thing you cannot do with an operating agreement. While you can use the term “share” to describe membership stakes in your company, LLCs are not permitted to sell shares in the same way that a corporation might.
Are operating agreements set in stone?
A common question: What happens if the partners in the business decide they want to change the terms of their agreement?
Most LLC operating agreements will include some provisions for amendment. In other words, the methods and procedures for changing your operating agreement should be listed in the agreement itself.
Do you need an attorney to draft your operating agreement?
It’s not legally required to have a lawyer create your operating agreement, and in some cases, you might be just fine using one of the many online templates that are available. With that said, this is a legally binding document that can have a big impact on how your LLC is run, so with any questions or clarifications, it’s often best to seek an attorney.
Protect Your Business with an Operating Agreement
The bottom line is that business documentation can provide clarity, consistency, and structure for how a business is managed, and for how different partners understand their own duties and powers. If you have chosen to structure your business as an LLC, there are a number of reasons why it makes sense to have an LLC operating agreement in place.