How Do You Draft an LLC operating agreement?
If you're forming a limited liability company (LLC), chances are you'll also want to draft an LLC operating agreement. This is a legal document between the members of an LLC that outlines how the business will be run.
Drafting an LLC operating agreement means determining basic company information such as:
- Administrative processes
- Management details
- Membership information
It also covers how members are admitted, when meetings are held, and how decisions are made, and it establishes the rights and responsibilities of each LLC member.
Once you draft your LLC operating agreement, all of the members must sign it before filing it with your state. You can hire a lawyer or use online software for drafting LLC operating agreements.
Be sure to keep your written documentation current so that you don't run into any issues down the line. For example, if there is a dispute among the members, lawyers will refer back to these documents to understand your situation. It's always better to have too much documentation than not enough.
Here is an article with steps to completing an LLC operating agreement.
Can I Write My Own LLC operating agreement?
You can draft your own LLC operating agreement. However, if you do, it's a good idea to have a lawyer look it over once you're done to make sure everything is in order.
For example, a multi-member LLC operating agreement should specify how the LLC will be managed and what types of decisions require the approval of all members or one class.
Whereas a joint operating agreement governs how property and profits are shared among spouses who are members of an LLC.
LLCs can enter into a limited liability company agreement that states what they must pay the LLC when they withdraw their share of ownership (or any other event). The LLC can also choose whether or not to buy life insurance for its members.
In short, there are many things to consider when drafting an LLC operating agreement, so it is a good idea to have an experienced attorney review it.
Here is an article on how to write an LLC operating agreement.
Can I Add an Operating agreement to My LLC?
You can add an operating agreement to your LLC, no matter how big or small your company is. Some smaller companies may work based on word of mouth alone, but that may prove difficult to enforce if trouble arises.
An LLC operating agreement establishes the rights and responsibilities of each LLC member so that members can refer to the documentation for any clarifications.
Remember, LLC operating agreements are legal documents dealing with business conduct. With information this sensitive, it is best managed by an expert.
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What Should be Included in an LLC operating agreement?
At a minimum, your LLC operating agreement should include the following:
- Company Details: Name and location are obvious choices, but you must also outline your business’s purpose. This may change in the future, but it still should reflect your current work.
- Membership Info: This is the framework for the parties involved in the LLC. The rights and duties of each member are outlined, and capital contributions are recorded. This includes identifying who will act as the LLC registered agent and who will be responsible for handling the important documents for the company.
- Member Changes: It should include information on how members can be added or removed from the LLC.
- Profits/Losses: The agreement should outline specifically how losses and profits will be disbursed among the owners. Money is usually a point of contention in agreements like these, so it is important to be clear in the documentation.
- Lease Term: This should include either a specific time interval or a broad statement setting a perpetual duration.
- Indemnification/Liability: It is important to include verbiage that helps to limit the amount the LLC can be held liable in the case of a lawsuit against the company.
- Dissolution: If things do not go as planned, it is important to have rules to dissolve a membership.
Here is an article that reviews what should be included in an LLC operating agreement.
Do I Need a Lawyer to Draft an LLC operating agreement?
While you are not required to have a lawyer draft your LLC operating agreement, it is recommended that you consult with one to ensure that your agreement is legally binding.
Lawyers can also help ensure that the LLC operating agreement matches the needs of your business. There are many different clauses and provisions in an LLC operating agreement, and knowing which ones to include or exclude may be difficult for someone who has never drafted an LLC.
It’s important to remember that a qualified attorney should always check legal documents like LLC operating agreements before finalizing them.
Here is an article on why you should have an LLC operating agreement.
What Does it Cost to Draft an LLC operating agreement?
The LLC operating agreement costs will depend on the state in which you form your LLC and the complexity of your business. Typically, an attorney will charge between $500 and $1,500 to draft an operating agreement.
Suppose you're a member of a professional organization such as the National Association of Women Business Owners (NAWBO). In that case, you may be able to obtain discounted rates or negotiate with your lawyer for less than the full price.
In addition, some companies offer templates that can be downloaded from their website at no cost. Read through the template before using it to ensure it meets your needs.
Here is an article on what it costs to draft an LLC operating agreement.
Why Do I Need an LLC operating agreement?
There are three key reasons to draft an LLC operating agreement, these include:
- Liability Protection: The operating agreement helps to separate and protect your personal assets separate from your business assets. To keep the liability protection that forms an LLC, you need to show that you are not commingling business finances with personal. Therefore, the LLC operating agreement is a crucial business document that proves you are operating a legitimate business.
- Protecting Against State Defaults: The bottom line is that if you don’t have a formal operating agreement if there is a suit, your state’s general default rules will apply. The state sets these, so there is no way to account for personalization. By risking using these terms, you may put your business under an unnecessary compromise.
- Open the Door for Investors: You may want to look into outside investors as you expand. Banks or other investors would commonly require an operating agreement as proof you have the power to make legal decisions on behalf of your LLC. Why not be prepared rather than have to scramble at the last minute?
As with any legal document, LLC operating agreements protect all parties from misunderstandings about how the business will run. Investing in a qualified attorney is always a good idea when legal documents are concerned and drafting an LLC operating agreement is no exception.
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