What is LLC Operating Agreement Drafting?
An LLC agreement is a legal document that explains important aspects of a Limited Liability Company (LLC) and how it’s run. It is used by company members so that they know their rights, duties, and more. This ensures clarity and prevents disputes.
By ensuring that the LLC is run properly with a sound agreement in place, it prevents members from being liable for the LLC’s debts. Without a solid operating agreement, state laws can result in members sharing profits and losses despite their specific contributions or ownership percentages.
Read the rest of this article to learn more about what’s included in an LLC operating agreement, how to draft it, and why you should hire a lawyer for help with the process to protect your interests.
What Key Terms are in an LLC Operating Agreement?
An LLC operating agreement usually contains terms such as the following:
- Management structure. The agreement must specify if the LLC is member-managed or managed by appointed managers.
- Profit and loss allocation. There should be clarity about how profits and losses are handled and distributed among members.
- Capital contribution. How much each member contributes to the company must be explained, as well as what timeline members have in which to make their contributions.
- Voting rights. How major company decisions will be made must be explained to prevent disputes.
- Ownership. This specifies how much ownership (in percentages) members have. Rules should also be provided for how new members can be added and how ownership is transferred should a member leave.
- Dissolution. When the LLC is dissolved, there should be a process in place for how this should occur and how assets will be distributed among remaining members.
How Should You Draft an LLC Operating Agreement?
To ensure your LLC operating agreement is legal and balanced, there are some important tips to consider.
Clarify Profit Distribution
The agreement must clarify exactly how the LLC’s profits are shared among members to prevent misunderstandings or conflict. You can choose the most suitable arrangement, such as if you want ownership percentages to determine profits or you would prefer to distribute profits based on members’ responsibilities.
Consider Management
Although your LLC can be member-managed, it can have a manager-managed structure. This means that some members don’t participate in daily operations or decision making. If you use a manager, your agreement should explain their rights and duties, as well as how they will be appointed.
Include an Amendment Clause
If you don’t clearly specify how your LLC operating agreement can be amended in future, default state laws apply. You should explain if the agreement can be modified by unanimous vote.
Provide Liability Protection
The LLC operating agreement should state that members’ personal assets are kept separate from the LLC’s legal and financial obligations. By defining this, you will minimize your risk of disputes, while ensuring all members clearly understand their rights and duties.
Explain How a Member can Leave
The LLC operating agreement should provide clarity for how members can leave. This should be fair and reasonable, such as by including a put option. This means that a member can withdraw and will receive a payout that’s equal to the market value of their interest.
An alternative option involves the member who wishes to exit having to find a third party to buy them out. If they don’t, the company will have the chance to buy back their equity.
Sign it
You have to sign the LLC operating agreement to make it legally binding. However, you don’t have to file it with your Secretary of State. It’s recommended to store it in a secure place with your other LLC records.
Do You Need a Lawyer for LLC Operating Agreement Drafting?
Hiring a lawyer to draft an LLC operating agreement ensures that the document is legally binding and drafted clearly to prevent disputes.
Here’s why asking a lawyer for LLC operating agreement drafting is better than writing it up yourself.
- Agreement customization. A lawyer will customize the document according to your LLC ownership structure and management. They will also consider your long-term goals.
- State law compliance. Since laws for LLCs and operating agreements vary in different states, a lawyer will ensure that the document is compliant with all relevant rules. This ensures document enforceability.
- Dispute prevention. By drafting the agreement clearly and professionally, a lawyer will minimize your risk of conflict between members.
- Limited liability protection. A lawyer will reinforce that the LLC and its members are separate, helping to preserve liability protection.
- Complex ownership clarity. If there are complicated arrangements, a lawyer will assess them so that the agreement provides clarity.
- Coordinating with other professionals. A lawyer can help you with tax planning considerations and obligations by consulting with tax professionals.
Where to Find a Lawyer for LLC Operating Agreement Drafting?
If you need to hire a lawyer to draft your LLC operating agreement, you might not know where to find one. You can easily locate a qualified lawyer on an online legal platform such as ContractsCounsel.
ContractsCounsel is one of the largest online legal marketplaces that gives you access to a curated network of vetted lawyers. All lawyers have the expertise required for drafting and reviewing contracts so that they’re balanced, legally sound, and clear.
To request that a qualified lawyer on the ContractsCounsel platform drafts your agreement, follow these easy steps.
1. Visit the ContractsCounsel marketplace and post your project for free.
2. Wait to receive lawyer bids. You’ll receive multiple bids from lawyers directly on the platform.
3. Review the lawyers' profiles. The platform provides extensive lawyer data, such as location, client ratings, years of experience, field of expertise, and previous projects completed on the platform.
4. Connect with a lawyer who matches your legal requirements. Hire them to draft your LLC operating agreement.
