Operating Agreements: What are they & What to Include

When forming an LLC there are a variety of different aspects involved in the formation and continuance of your organization. One aspect of formation when it comes to an LLC is the operating agreement. An operating agreement is essentially a set of rules or guidelines for a business. Although it is not legally required in order to operate, it is highly recommended. This is because it governs how the LLC is run and provides regulation and structure in case a situation arises between members.

When you have guidelines written down in advance it makes it clear to your team and board of directors what their duties are, who makes the decisions, and how the business will be run.

How Operating Agreements Work in LLC’s

Although there is never a business that starts with ill intent or the idea that a problem may arise, an operating agreement helps to keep it that way. In some cases, members are liable for actions that go outside of the protections of general LLC liability law. Especially in the case of personally guaranteed debts. An example of a personally guaranteed debt would be a business loan.

Operating agreements help to keep all duties of the LLC members apparent and keep the rules visible for everyone. In the event there is a disagreement, it can help to settle arguments in conversation or even in court.

What Needs to Be Included in an Operating Agreement?

If you are drafting an operating agreement for your limited liability company, you are required to include the following information.

The Name of Your LLC

In order to signify which LLC the operating agreement is about, the name of the LLC must be clearly placed within it. This is essential because otherwise it can not be proven nor connected.

Your Company’s Articles of Organization

In order to make connections between the articles of organization and the LLC, these pieces of information should be included in the operating agreement.

The Duration of the LLC

In some cases, an LLC can be conditional. This means although it may be in business for a short period of time, it will not be around forever. This is an indefinite LLC.

Your Company’s Address

You will need to include the operational address of your LLC. This must be either the place of business of your LLC or your personal business address should you run an online business.

Name and Address of Your Registered Agent

Every LLC must have a registered agent. This person or business must have an address within the state of formation of your business. This needs to be included in the operating agreement as well.

Your Business’s Purpose

Every business has a purpose. Whether this is to sell specific goods, provide services, or as a holding company. This must be included in the operating agreement.

Why Operating Agreements Are Important

There are various reasons why having an operating agreement is important. Operating agreements often are able to prevent disputes between members. The operating agreement can be pulled up to clarify any verbal agreements as well.

Finally, the operating agreement will protect the facts of the agreement legally in court, and even protect the limited liability status of the business. Again, operating agreements are not required in every state but it’s in your best interest to create one. A written document that clearly outlines the duties and responsibilities of your members will help ensure compliance.

Should I Have an Operating Agreement?

It is very important to have an operating agreement for an LLC. Even if your business is set up as a holding company or a regular LLC, this can prevent a lot of trouble in the future. Operating agreements will protect each member within the organization. Although disagreements are never planned, those between business partners can be ruthless. The operating agreement protects everyone.

It is essential to run your LLC with an operating agreement if you wish to be in charge of your business. LLCs will automatically be governed by state laws if they do not have an operating agreement, which can take control from the hands of the members.

Essentially, the operating agreement ensures that all formalities are completed and that the roles are defined within the organization. You will never question the obligations of each member, and the LLC will be a clearly defined entity in the eyes of the law.

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