Operating agreement

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An operating agreement is a key document used by LLCs because it outlines the business' financial and functional decisions including rules, regulations and provisions. The purpose of the document is to govern the internal operations of the business in a way that suits the specific needs of the business owners. Once the document is signed by the members of the limited liability company, it acts as an official contract binding them to its terms. Many states in the United 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 LLCs. 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.[1]

Most states do not require operating agreements. However, an operating agreement is highly recommended for multi-member LLCs because it structures your LLC's finances and organization, and provides rules and regulations for smooth operation. The operating agreement usually includes percentage of interests, allocation of profits and losses, member's rights and responsibilities and other provisions.[2] Operating agreements are legally significant. Having a correctly drafted operating agreement is crucial in case legal disputes arise between business owners.[citation needed]

While there is an enormity of material available online to help you get started with constructing an operating agreement, much of it free, it is important to always consult with an attorney and a financial advisor before signing an operating agreement or any other contract or agreement that may affect your business, income, or liability.

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