What is a Written Operating Agreement?
A written operating agreement is a legal contract that is drawn up during business formation of a limited liability company ( LLC ). This agreement defines certain rules, processes, and provisions that govern the way that businesses are operated internally.
Operating agreements are important because they help differentiate limited liability companies from sole proprietorships, which protects a business owner’s personal assets from their business ones.
Written operating agreements are legally required for limited liability companies in only a few states, such as New York.
How to Write an Operating Agreement – Step by Step
If you want to establish your business as a limited liability company, you should have a written operating agreement. This might sound like a daunting process, but it’s actually not a complicated as you might think. With the help of business lawyers, you can craft an operating agreement for your multi-member LLC or single-member LLC in five easy steps.
Step One: Determine Ownership Percentages
The first section of your written operating agreement should contain vital information about the members of your LLC:
- Names
- Addresses
- Titles
Once you establish the basic details, it’s time to move on to more specific information regarding the members – ownership percentages. When you start an LLC, multiple people usually come together and pool their resources to get the business up and running. This might include money, knowledge, or time. In exchange for this, each member receives a percentage of ownership in the company, which can be determined however the group would like.
Decide how much ownership each founder should have in the LLC and document it in your written operating agreement.
Step Two: Designate Rights, Responsibilities, and Compensation Details
Protection is one of the most important aspects of an operating agreement. The next section of your legal document should include information about the rights and responsibilities of each member of the LLC. These might include:
- Voting rights
- Daily duties of each member
- Performance requirements
- Hourly or salary pay
Step Three: Define Terms of Joining or Leaving the LLC
Successful operating agreements set the groundwork for successful business dealings in the future. That means that when you write an operating agreement, you must come prepared for certain events that could occur, such as having new members join your company or existing members leaving.
It’s essential that you have an action plan for when one of these events occur. Make sure to be as detailed as possible and to define what happens to any ownership percentage that a departing member owns and what a joining member will gain after becoming a member.
Step Four: Create Dissolution Terms
Creating dissolution terms for when an LLC closes is another important part of an operating agreement. This section should include specific instructions, duties, and responsibilities of each member in the event of a dissolution. Make sure to include vital details, such as:
- What happens to any company debt
- How any remaining assets should be divided
- Member duties, regulations, and rules
Step Five: Insert a Severability Clause
A severability clause serves to protect certain terms of the agreement in case any part of it is deemed in conflict with state or federal law. It states that should any part of the agreement be in conflict, the rest of the agreement will still sand. This clause is extremely important, so be certain that you don’t leave it out.
Check out this article to learn more about how to write a solid written operating agreement.
Operating Agreement Template
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What Should be Included in an Operating Agreement?
Successful operating agreements are all-inclusive of the operations of a limited liability company. If you leave out any important details, all members’ liability is at risk, so it is essential that you mind the details and make sure everything that should be included, is.
The best way to ensure that your operating agreement is legally sound is to consult the help of business lawyers. These professionals will help you make sure you include all the most important details, such as
- Names, addresses, and titles of each member
- Ownership percentages
- Member rights and responsibilities
- Responsibility, liability, and powers of members and/or managers
- Profit and loss distribution
- Buying and selling rules
- Dissolution instructions
- Meeting guidelines
- Articles of organization
- Certificate of organization
Here is an article about the most important aspects of operating agreements.
See Operating Agreement Pricing by State
- Alabama
- Alaska
- Arizona
- Arkansas
- California
- Colorado
- Connecticut
- Delaware
- District of Columbia
- Florida
- Georgia
- Hawaii
- Idaho
- Illinois
- Indiana
- Iowa
- Kansas
- Kentucky
- Louisiana
- Maine
- Maryland
- Massachusetts
- Michigan
- Minnesota
- Mississippi
- Missouri
- Montana
- Nebraska
- Nevada
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Ohio
- Oklahoma
- Oregon
- Pennsylvania
- Rhode Island
- South Carolina
- South Dakota
- Tennessee
- Texas
- Utah
- Vermont
- Virginia
- Washington
- West Virginia
- Wisconsin
- Wyoming
Types of Operating Agreements
Operating agreements are essential to keeping limited liability companies in alignment with state and federal law. Whether you have a single-member LLC, a multi-member LLC, or a partnership, you need an operating agreement. The guidelines for each are similar, but there are a few key differences.
Single-Member LLC Operating Agreement
Single member LLC operating agreements are optional in most states, but you shouldn’t let that stop you from creating one. Having an operating agreement on file for your limited liability company still protects your personal finances from your business ones, so it is not something you want to opt out of. The only difference between this type of operating agreement and a multi-member LLC operating agreement are:
- Ownership percentage : Since there is only one member, one person owns 100% of the company.
- Voting rights : Since only one person owns the company, their decision is final.
Multi-Member LLC Operating Agreement
Multi-member LLC operating agreements are vital, though legally mandatory in only a few states, such as New York. This is because operating agreements determine important rules, regulations, and workflows for businesses that are needed in the event of any legal battles. In many cases, a multi-member operating agreement overrides state default rules, which gives business owners and LLC members more freedom to do what they want. They also help to protect all members’ personal finances.
Partnership Operating Agreement
Partnerships have legal documents that are similar to operating agreements called partnership agreements. Even though states don’t require partnership agreements, they are still recommended to protect the interests of the members of any partnership. Since disagreements between partners are bound to happen with any partnership, they are also helpful to settle arguments and make sure there is legal recourse if any legal disputes arise.
Learn more about the types of operating agreements by checking out this article.
Can I Write My Own Operating Agreement?
Operating agreements contain vital information about business dealings and are crucial for legal disputes down the road. Consequently, it is always wise to consult business lawyers for assistance with crafting them, but that does not mean you can’t write an operating agreement. As long as you ensure you contain all the necessary details and make sure you are as thorough as possible, you should be able to craft an operating agreement that will stand up in court.
Check out this webpage to see an example of an operating agreement.
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Get Help with an Operating Agreement
If you want to create an operating agreement for your limited liability company, but you’re not sure where to start, help is available. Professional business lawyers know all the ins and outs of operating agreements and can make sure yours is legally sound. Post a project on ContractsCounsel today to get in touch with business lawyers well-versed in creating written operating agreements for all types of limited liability companies.
