A limited liability company allows you to create a small business that protects your personal assets from creditor claims. This makes an LLC a popular company structure. Still, your business may not function to your benefit if you do not compose a comprehensive operating agreement.
With an operating agreement, you outline the structure of your business along with other provisions that help the company operate and stay profitable. While these agreements vary by company, there are many provisions which are common and can work to keep a business from premature ruin.
Business purpose and duration
An operating agreement must state the purpose of the LLC, such as the industry and the primary product or service. It should also indicate whether the company will operate indefinitely, or whether the business will terminate at a certain date.
Ownership and management structure
The agreement should clearly define the ownership percentages of each member and their respective roles within the company. This section specifies whether the LLC will be managed by members or management. A member-managed structure allows members to handle day-to-day operations, while a manager-managed structure delegates these responsibilities to appointed managers.
The agreement should outline procedures for member meetings, including frequency, notice requirements and voting thresholds for key decisions. This ensures transparency and democratic decision-making within the company.
Tax treatment
LLCs have the flexibility to choose their tax treatment. The operating agreement should specify whether the federal government will tax the LLC as a partnership, S-corporation, C-corporation, or a disregarded entity for single-member LLCs. This decision impacts the tax obligations of the company and filing requirements.
Member exits and disputes
Operating agreements can also detail the process for admitting new members and the circumstances under which a member can leave or be removed from the LLC. This section may also include provisions for the transfer of ownership interests.
Since disagreements among members can happen in any business, the operating agreement should establish a clear process for resolving disputes. Such methods may include mediation or arbitration. This can help a business avoid costly and time-consuming legal battles.
An LLC operating agreement tailored to the specific needs of a business serves as a roadmap for operations and helps prevent misunderstandings among members. By carefully considering and including key provisions, you can establish a solid foundation for the success of your enterprise.
