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If you’re starting a small business, you might have heard the term “LLC operating agreement” thrown around.
While it may sound self-explanatory, do you know what this type of agreement is and how it works?
To answer these questions and give you everything you need to know about LLC operating agreements, this guide will cover:
- What an LLC operating agreement is
- Examples of well-thought-out agreements
- A template for your agreement
- The benefits of these agreements.
- An LLC Operating Agreement is a document that outlines the general principles and regulations for a small business.
- Once signed, it acts as a legally binding contract on the members.
- LLC operating agreements are not mandatory, but they are highly recommended for all businesses.
- You can draft your agreement using an online template, or employ a professional to help you out.
What is an LLC Operating Agreement?
In the simplest terms possible, an LLC operating agreement is a document that lays the foundations and guidelines for a Limited Liability Company (LLC) in the United States.
It acts as a type of contract between the members of the LLC and outlines the company’s approach and decisions regarding the rules and regulations of its operation.
Once signed by each member, the rules outlined in the document bind those who sign it. As such, it is a great way to ensure proper business practices are adhered to.
This type of agreement was introduced by the government as a way for smaller businesses to have access to the same protection from liability that corporate shareholders enjoy.
While creating such a document is not mandatory, it is highly recommended that new businesses create an LLC operating agreement to ensure that operations run smoothly.
LLC Operating Agreement Examples
Here are some examples of LLC operating agreements. Click the company’s name in the headings to be taken to their LLC operating agreement:
This is a great example of a well-written LLC operating agreement from Global Social Media LLC in Nevada.
This type of LLC operating agreement is for a multi-member LLC, which means it has several signees (as you can see at the bottom of the agreement).
This is a very extensive agreement and serves as a great example for all small businesses.
This LLC operating agreement example regards a single-member LLC. Even if you are the only employee in your business, it is a good idea to draft and sign an LLC operating agreement.
A quick look through this document will show that it covers everything from management to taxation.
This is a fantastic example of how a sole-owner small business should be set up.
Related article: 7 must-have documents for an LLC
LLC Operating Agreement Template
The exact specifications of your LLC operating agreement will vary based on your state and the number of people within your LLC.
However, here is a fantastic free template from Simuldoct that covers all the basics and will help you draft an extensive and well-written LLC operating agreement.
Click this link to be taken to an LLC operating agreement template.
What should an LLC operating agreement include?
While an LLC operating agreement offers you the chance to customize your business’s guidelines, there are a few components that your agreement should include to ensure you cover all bases:
Basic information about the business: This includes the name and address of the business, as well as any other basic facts you feel are relevant
Tax treatment preference: Including a tax treatment preference in your LLC operating agreement is of the utmost importance.
Doing so ensures there are no taxation issues between members further down the line, and that rules and regulations surrounding tax have already been decided
Member information: Make sure to include all member information in the agreement, including each member’s financial interests.
This means that if there is ever a dispute during the sale or division of the company, the portion belonging to each member has been laid out and signed in the agreement.
Management structure: The management structure of the business should be established in the agreement to ensure there is a foundation and guideline as to how the company will be structured.
Operating procedures: Operating procedures cover how the company wishes to go about its operations. It is a good idea to set rules within the agreement so that all staff members adhere to a proper code of practice.
A liability statement: Make sure to include a liability statement within the agreement so that it can be referred back to should any issues arise.
Additional provisions: If you think your company needs extra provisions within the agreement, make sure to include them so that you cover all your bases.
Benefits of LLC Operating Agreements
One of the key benefits of an LLC operating agreement is that it limits liability for businesses and members, both ways.
As such, one cannot be liable for the actions of the other should something go wrong further down the track.
Furthermore, it creates a strict guideline and foundation that all members must adhere to.
This ensures that everyone abides by the same rules and approved practices when conducting their business.
Finally, an LLC operating agreement adds structure to the company.
By outlining roles and jobs within the agreement, you know exactly what each staff member needs to do to complete their job successfully, and it helps you place them in the right position within the company.
How to Create an LLC Operating Agreement
To create an LLC operating agreement, you will first need to draft it, have all members read through it, and then commence the signing process.
There are several ways in which you can go about this process.
Firstly, you can do the entire process yourself and use a free template such as the one we have provided above to guide you.
You can also use an online interactive service like LawDepot that will ask you questions to form your custom agreement.
If you want to make sure that no stone is left unturned, it can be a good move to hire a professional such as a lawyer or LLC specialist to draft the agreement for you.
Congratulations on reaching the end of this article! You should now know a little bit more about LLC operating agreements.
If it sounds like something that you want to create for your business, there are many resources online that can help.
Whether you are looking for a free template or a professional in your area, you should be able to find what you are looking for with ease.
Simply search for your specific state and LLC operating agreements to be pointed in the right direction. Good luck!
Is an LLC operating agreement required?
No, an LLC operating agreement is not required by law. However, it is a good idea to have one.
Can you make changes to an LLC operating agreement?
Yes, changes can be made to an LLC operating agreement with the consent of all members. This is not an issue if you are under a single-member LLC.
Are LLC operating agreements legally binding?
Yes. Once the agreement is signed, it is an official binding contract for all members.
Does a single-member LLC need an operating agreement?
While it is not mandatory, it is a good idea for single-member LLCs to have an operating agreement to reduce liability.