This is a complete guide to Operating Agreement. Learn everything about Operating agreements in this in-depth guide.
Operating Agreement 101: Comprehensive Guide
What is an LLC Operating Agreement?
If you’re thinking about starting a new business, you might have heard of the term “Operating Agreement” or “Operating Agreement for LLC.” This refers to a document which is set out the rights and responsibilities of the members and managers of a Limited Liability Company. If you do not have an Operating Agreement, state LLC law will govern the operation of your LLC.
An Operating Agreement is very similar to a partnership agreement. A partnership is essentially an agreement between two or more people to create a business. The Operating Agreement covers details such as how profits are distributed, how the company ends, what happens if a member wants to leave the business, etc.
An Operating Agreement should be arranged by an attorney. However, if you cannot afford an attorney, there are templates available for free online which can be used to create one. You must take your time creating an Operating Agreement so that it properly reflects your business needs.
Benefits of Having an Operating Agreement
An Operating Agreement is not required in every state. Just a few states required an Operating Agreement like California, Delaware, Maine, Missouri, and New York, but it’s highly recommended to have one. Here are some of the benefits of having an Operating Agreement:
- It protects your business. It protects your personal assets from lawsuits against your business. It also protects your business from lawsuits against you personally.
- It defines the rights of the members, managers, and other stakeholders. It can help eliminate misunderstandings among members or between members and third parties.
- It can save your time and money when it comes to resolving disputes with fellow members or other third parties.
- It helps avoid misunderstandings among members regarding their rights and responsibilities.
- It is an efficient way to complete any major transactions such as selling the company or adding new members.
Downsides of Not Having an Operating Agreement
For example, if you’re opening a business with other people and without an operating agreement in place, then state law would dictate that all members must agree to major changes like dissolving the business or selling assets. An operating agreement will ensure that everyone agrees on these issues ahead of time and prevents disagreements that’s why it’s important to have an Operating Agreement.
What Must be Included in an LLC Operating Agreement?
The following elements are must be included in an operating agreement:
- The Name of your LLC
- Information about the Articles of Organization
- The Names and addresses of the LLC Members
- The Name and address of the Registered Agent
- Purpose of your business
Why You Shouldn’t Use a Free Operating Agreement Template
My experience as a business law firm tells us that many people who come to us have already used a free agreement form or have hired an inexperienced attorney to draft an agreement for them. This is not a good idea.
Trying to save money by using a general Operating Agreement template from the internet is like taking a chance on the lottery. You may be lucky and find an agreement that is tailored to your needs and your state’s requirements, but you may also get caught with one that doesn’t take into account all the elements of your business situation. So the better idea is to hire a professional attorney to create your Operating Agreement.
Free Operating Agreement Templates
Here are the resources where you get free Operating Agreement Templates of almost all states.
When you have finished drafting your LLC’s operating agreement, you should keep a copy for yourself and give copies to the other members of your LLC. It is a good idea to also make a file or binder that you can keep copies in for easy access. You do not need to fill it with your state.
All states have different rules about whether or not an operating agreement needs to be filed, and if so, where. The most common requirement is that the LLC has to file an initial report with the secretary of state within 90 days of formation.