Operating agreement

An operating agreement is an agreement among limited liability company ("LLC") Members governing the LLC's business, and Member's financial and managerial rights and duties. Many states require an LLC to have an Operating Agreement. LLCs operating without an Operating Agreement are governed by the State's default rules contained in the relevant statute and developed through state court decisions. An Operating Agreement is similar in function to corporate by-laws, or analogous to a partnership agreement in multi member LLC's. In single member LLCs, an operating agreement is a declaration of the structure that the member has chosen for the company and sometimes used to prove in court that the LLC structure is separate from that of the individual owner and thus necessary so that the owner has documentation to prove that he or she is indeed separate from the entity itself.

An Operating Agreement is used to override default rules imposed by a state's LLC Act. Operating Agreements generally address:

• the members' percentage interests in the LLC
• the members' rights and responsibilities
• the members' voting powers
• how profits and losses will be allocated
• how the LLC will be managed
• rules for holding meetings and taking votes
• buyout, or buy-sell, provisions, which determine what happens when a member wants to sell his or her interest, dies, or becomes disabled

Limited Liability Companies are very flexible in nature and the operating agreement defines each member or manager's rights, powers and entitlements. This includes capital accounts, membership interest, distributions of profit and allocated tax responsibility, just to name a few. This internal document is an agreement set by the company members that contains provisions for critical items and rules that run the company. Operating agreements can be amended at any time by the company members or managers. LLC's that do not have an Operating Agreement will be governed by state LLC law rather than what you and your business associates decide.

External links

Examples

• Free LLC operating agreement PDF and Word doc

More information

• Yahoo Small Business