Operating Agreement Vs Business Plan
Definition of the financial and management structure THE CO-OWNERS OF SAMs must document their profit-sharing and decision-making protocols, as well as the procedures for processing the departure and addition of members. Without a thorough operating agreement, not only are you and your co-owners ill-equipped to resolve misconceptions about finance and management, but you`re also subject to the rules of your state law (see below). Company agreements and articles of association have similarities in form and function. Both documents contain similar information about the respective company, e.B. company name, purpose and how the company will operate. In addition, each document defines the ownership and management of each structure. Both documents are necessary for any corporate structure in the business world to function optimally. It is important to have a plan that is clearly articulated in the company agreement on how you will handle situations if one of the members decides to retire, dies or wants to sell their stake in the company. Your company agreement should include rules about what will happen if a member decides to leave for any reason. Your business plan can also address potential problems and what you can do if they occur. When or when that time comes, you can be better prepared to deal with problems and be more confident in your choices. You don`t need to start your business plan from scratch.
The templates are available online, in word processors and in books. You don`t have to follow the templates to the letter, but they usually serve as a good place to start. An LLC operating agreement describes the operating rules of a limited liability company. It describes day-to-day operations as well as what happens when a conflict arises or a member of it occurs. Read More If cost is an issue, software that allows you to create your own LLC may be the best alternative. For example, LLC Maker (of Nolo.com) uses your contribution to customize an operating agreement that meets your needs and those of your co-owners and the requirements of your state laws. At the beginning of the business is the best time to plan the dissolution or liquidation of the business. Just like a marital marriage contract, members should make plans about how they want to end the business while everyone is still cooperative and happy.
The agreement is expected to create a leadership structure and set of roles that define decision-making, from day-to-day operations to important business decisions. What kind of decisions require a vote and what can be left to the discretion of each member? Who gets a vote and how does the vote take place? How is the power of the voice distributed? Is a regular majority acceptable, or should you demand superstrate or even unanimity for certain decisions? A company agreement also clarifies what happens if the owner dies or is unable to manage the business. that is, it creates a succession plan. Your operating agreement must include a clause that determines who manages the LLC if you are unable to do so. Without this specific provision, it can be difficult for your family to sue or sell the business without lengthy litigation. “In a company`s situation, it is very common for additional agreements to be created, often referred to as a shareholder agreement, to describe in more detail the information typically contained in a company agreement,” said Mr. Gauvreau. A corporate agreement is a legally binding document that limited liability companies (LLCs) use to describe how the business is run, who owns assets, and how they are structured. If a company has several members, the operating contract becomes a binding contract between the different members. In addition to clarifying ownership and structure, the company agreement can also name the registered agent, provide details such as holding meetings, selecting managers, and explaining how the company can add or remove members. Simply put, the company agreement describes the functional and financial decisions of a company.
Once the members of the LLC have signed it, they are officially bound by its terms. An operating agreement describes and defines the internal operating procedures and relationship agreements between the members (owners) of a limited liability company (LLC). The overall purpose of a company agreement is to establish guidelines on how entrepreneurs behave professionally towards each other in terms of management and operation. Articles of association are similar to an operating agreement, except that they are used in companies (S companies and C companies) instead of LLC, and they often have legal requirements for the information they must contain. Protecting your limited liability status The main reason for an operating contract is as simple as it is important: it helps the courts respect your limited personal liability. This is especially important in a one-person LLC, where the LLC looks like a sole proprietorship without the formality of an agreement. The very fact that you have a formal written operating agreement lends credibility to the separate existence of your LLC. While most LLC management decisions are made informally, sometimes a decision is so important or controversial that a formal vote is required. There are two ways to distribute voting rights among LLC members: either each member`s voting rights are equal to their share as a percentage of the corporation, or each member receives one vote – called “per capita” voting. Most LLCs award votes in proportion to members` ownership interests. Whichever method you choose, make sure your company agreement specifies the number of voting rights each member has and whether a majority of votes or a unanimous decision is required to resolve a problem. Your company agreement should also clearly define the share of allocated profits that should be distributed to members each year.
The question of whether members can expect the company to pay them enough to cover the cost of income taxes they owe on profits should also be answered. In addition, it should specify whether the owners are allowed to make money from the profits of the business at will or whether distributions are made regularly. Missing or inaccurate information in an operating agreement or bylaws can seriously affect the operation of the business and make the business vulnerable to legal issues. If a company submits the items incorrectly, the document may be rejected, which delays the creation of the company. A poorly organized business agreement can lead to conflicts between owners. Without instructions to resolve disputes, business owners may have to resort to litigation to resolve disputes. The statutes of the organizational and operational agreements are both essential documents related to the formation of an LLC, but there are important differences between the two. Organizational articles (also known as deeds of incorporation) are an LLC incorporation document that is filed with the state to register your business as a legal entity. If you form an LLC with Rocket Lawyer, we will file this document on your behalf.
An LLC operating agreement, on the other hand, is an internal document that describes how the business is run. If there is only one owner of an LLC, is an operating contract still required? The answer is YES! Here are four reasons why a SINGLE member LLC should prepare for and adhere to an operating agreement. What you need to include in your operating agreement There are a variety of issues you need to address in your operating agreement, some of which depend on the particular situation and needs of your business. .
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The LLC operating agreement - why is it important and what should it say? Blog Kentucky Business & Corporate Law Blog
An LLC is a fairly limitless business form. Generally, an LLC can be and act in any number of ways, tailored to how you want your company to operate. The Kentucky LLC statute provides several gap-filler provisions, but most of these can be overridden by the terms of the operating agreement, making the operating agreement a nearly indispensable part of any LLC.
The operating agreement is not a requirement of the LLC statute, but it should be a necessity in terms of providing a set of rules for the running of the company. It functions as the backbone of the LLC and sets a system in motion that should run smoothly and guide the business so that the day-to-day business can be handled efficiently. An operating agreement should be crafted with the specific company it will pertain to in mind, with particular attention paid to company goals and the relationship between the members. Companies really need to work with an attorney to draft the operating agreement - careful drafting in the beginning will save a lot of stress in the end.
An operating agreement is also a good way to show a court that the owners have been conscientious in setting up the business legitimately to maintain the shield from personal liability. If drafted carefully, it can also handle internal conflicts and provide peaceful resolutions to problems that arise. Ultimately, it also allows the company to run the way the owners want it to, rather than run according to the default provisions of the LLC Act.
Operating Agreement vs. Business Plan
Generally, an operating agreement sets up the structure and operation of the business for the life of the business. That is not to say that members shouldn't review this agreement from time to time, but the operating agreement is more in the nature of a skeleton outline of the business. A business plan sets out company goals along a timeline and is more of a roadmap that gives an indication to the members and others (lenders, for example) of where the company is going and how it will theoretically get there. A business plan can be beneficial for lenders to see, for instance, when considering a business loan.
What Should the Operating Agreement Contain?
There are some provisions that every agreement should contain, just as a general rule:
Operating agreements should specify how the profits (or losses) will be split among the members and when/how distributions will be made, or whether they can be withdrawn at will (and LLC members must pay taxes on profits whether distributed or not).
The agreement should also specify how major business decisions will be made, as well as what happens to minority members or dissenters. For instance, Kentucky's LLC Act has no dissenter's rights, so the agreement drafters should consider whether to write those in. The agreement will ultimately govern the relationship between members in a majority and the minority on any given decision.
The agreement should definitely contain provisions for how to add or remove members and the circumstances that can rise to that. Will the LLC dissolve when a member leaves? Can a member be forced out? How can a member cash out, and what will the effect be on the LLC when he or she does? The operating agreement should answer all of those questions.
The agreement should create a managerial structure and a series of roles that define the decision-making, from the day-to-day operation on up to major business decisions. What sort of decisions will require a vote, and what can be left to the discretion of individual members? Who gets a vote, and how does voting take place? How is the power of the vote allotted? Is a regular majority okay, or should you require a supermajority or even unanimity for some decisions?
Also, the agreement should include provisions governing amendment of the agreement itself - how can it be amended, what sort of vote does it take, what process is necessary, and it is the same for all amendments to the agreement.
There are plenty of ways to anticipate events that ordinarily could lead to the end of the LLC. For instance, drafters can insert transfer restrictions so that members can't transfer membership or ownership without consent of the other members. The agreement can include a right of first refusal, so if a member wants to sell to a non-member, he or she first has to offer to sell the interest to the other members.
General vs. Specific Provisions
An operating agreement can be as simple or complex as the members want it to be, but leaving the provisions of the operating agreement very basic or vague can set up a series of problems for the LLC that it has to resolve. The entity then becomes a continuous exercise in problem-solving. It's best to set as many rules as possible to stave off any potential conflicts, especially while everyone is at the beginning stages of the entity and still working well with the others. Organizers will want to resolve conflicts now and solidify any verbal agreements as to how the company will run.
Planning for the end
In the beginning of the business is the best time to plan for the dissolution or winding up of the company. Just as with a marital prenuptial agreement, members should make plans for how they would like to see the company end while everyone is still cooperative and happy.
The good thing about planning ahead is that members can cut off a lot of avenues ahead of time that could lead to greater conflict and really make dissolution a real mess. An operating agreement can limit the ability of minority members to interfere with the business decisions of the majority, set up forceful removal of members who won't cooperate, and set in stone all the terms and methods of valuating members' shares so that there isn't litigation over them in the end. Any possible problem that can be accounted for ahead of time is just that much more time not spent in court fighting over it.
Sometimes the operating agreement gives more power to a member than anyone anticipated. For instance, a minority member unhappy with the outcome of a vote may threaten dissociation that requires a cash out that may cost the entity in capital to the point where the decision made is no longer feasible and might be reconsidered. It's important to understand how the power and vote is distributed throughout the operating agreement and ways in which both the majority and the minority can affect or even override each other.
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What Are Articles of Incorporation and Operating Agreements?
Learn whether your business needs an operating agreement, bylaws, articles of incorporation, or a certificate of formation.
- An operating agreement outlines the relationship between business owners, and articles of incorporation outline a business’s relationship with the state.
- All limited liability companies (LLCs) can benefit from having an operating agreement and a certificate of formation.
- All corporations can benefit from having bylaws and articles of incorporation.
- This article is for business owners who want to understand the similarities and differences between operating agreements and articles of incorporation.
Filing the proper paperwork is an essential element of starting a business . Although choosing the best legal structure for your business and filling out forms can seem tedious and daunting, these steps are often legally required parts of the process.
Many small business owners get confused about operating agreements and articles of incorporation. There’s a good chance you’ll need some version of both for your business, so it’s important to understand each document’s purpose.
What is an operating agreement?
An operating agreement outlines and defines internal operating procedures and relationship agreements among the members (owners) of a limited liability company (LLC) . An operating agreement’s general goal is to establish guidelines for how the business owners professionally relate to one another in terms of management and operations.
Bylaws are similar to operating agreements, except they’re used in corporations (S corporations and C corporations ) instead of LLCs, and they often have statutory requirements for the information they include.
An LLC is a business structure that protects a business owner’s personal assets from business debts or if the business faces a lawsuit or files for bankruptcy .
What should an operating agreement include?
The information you include in your operating agreement or bylaws depends on your business’s and state’s specific requirements. However, an operating agreement generally includes ownership, operations, management and financing details.
Robert Gauvreau, CEO of accounting tax law advisory firm Gauvreau, created an outline for the information an operating agreement should cover, including the following elements:
- A description of the business operations.
- The separation between the LLC member and the business entity (an outline of how they are separate entities and how they work together).
- The succession plan (how an owner exits and what happens if an unexpected issue with an owner occurs).
- How managers get appointed, and their responsibilities and obligations to the business.
- How members/owners get to vote on important issues.
- The restrictions of transfer of ownership and how it occurs.
- How funds are raised and repaid from the business.
- How profits, losses and distributions are to be treated.
- How the books and records should be maintained.
An operating agreement can also include other items you feel are necessary to business operations and the protection of the business’s and owners’ rights.
Does every business need an operating agreement?
Depending on your business type (LLC, S corporation, C corporation) and state, you may be legally required to file an operating agreement. For example, any LLC conducting business in California , Delaware, Maine , Missouri or New York must file an LLC operating agreement. Although LLCs in the other 45 states aren’t legally required to have an operating agreement, it is highly recommended.
Similarly, corporations (S corps and C corps) are not legally required by any state to have an operating agreement. Still, experts advise owners of these businesses to create and execute their version of an operating agreement, called bylaws.
“Bylaws establish the rights and duties of the parties involved in the corporation and, if properly followed by the parties, limit the possibility that courts will ‘pierce the corporate veil’ and hold shareholders personally liable for corporate debts,” said Kelly DuFord Williams, founder and managing partner of Slate Law Group. “Additionally, some banks and lenders will ask for corporate bylaws to ensure the legitimacy of the corporation before extending loans or opening accounts.”
Bylaws often include succession-planning agreements and decisions. This prevents business closure when a founder dies or an owner exits the company.
What are some common mistakes with operating agreements?
Experts say business owners sometimes make the following mistakes when creating operating agreements:
- Excluding important information. When rushing to put your business’s operating structure in place, it’s tempting to cut corners and skip seemingly unimportant sections of Gauvreau’s outline. However, all the items in that outline are included for a reason. It’s essential to include every part of the outline.
- Including too much information. On the other end of the spectrum is including too much information in your operating agreement. A lawyer specializing in LLC affairs can identify sections that could cause more problems than they solve.
- Using vague language. An operating agreement should be clear and precise. Working with an expert on operating agreements can help you leave no room for confusion or misinterpretation in your agreement’s language.
- Keeping it the same forever. Periodically checking your operating agreement to ensure it remains valid and relevant is key to a solid agreement. Experts suggest reviewing your agreement with a lawyer once a year to identify potential areas for change.
Can you change your operating agreement in the future?
Yes, you can change your operating agreement. Doing so is typically easy. You won’t have to file revisions with any government or regulatory bodies. You’ll need to gather your LLC members to approve changes via written amendments. You’ll then store this file alongside your original operating agreement for documentation purposes.
What are articles of incorporation?
Articles of incorporation , also known as a certificate of incorporation or corporate charter (certificate of formation for LLCs), is a legal document that formally establishes a corporation in the eyes of the state.
The main benefit of articles of incorporation is the legal protection it provides for your personal assets, because this document separates the business’s assets from the business owner’s assets. Articles of incorporation are often filed with the secretary of state, with a filing fee of roughly $50 to $300.
What should articles of incorporation include?
The information you include in your articles of incorporation or certificate of formation will depend on your business’s and state’s specific requirements. However, Gauvreau said each document typically covers the following information:
- The legal business name and address of the business.
- The purpose of the organization.
- How the corporation is required to operate (bylaws).
- The names of the initial directors and incorporators of the entity.
- The name and address of the registered agent.
- What share ownership is available to be held by investors.
- What restrictions are placed on the business activities.
- The date the business was created.
Your articles of incorporation may need additional information depending on the state where you operate.
Does every business need to have articles of incorporation?
Whether you are legally required to file articles of incorporation will depend on the type of business you own. For example, LLCs aren’t legally required to file articles of incorporation, but it is highly recommended for LLCs to have a certificate of formation. On the other hand, every corporation is legally obligated to file articles of incorporation with the state.
“Every corporation must create its articles of incorporation and must file them with the state in which they choose to incorporate,” DuFord Williams said. “This is the first step in establishing a corporation – the corporation does not exist until the articles are filed.”
What are some common mistakes with articles of incorporation?
Business owners sometimes make mistakes when creating and filing articles of incorporation, including the following:
- Not reviewing and adhering to state guidelines. You should double-check that any guides you’re following about how to file articles of incorporation pertain to your state. Rules for filing can differ substantially by state. You should also confirm that any attorneys you work with are well versed in your state’s guidelines.
- Choosing an invalid registered agent. Not just any person or company can be the registered agent for your articles of incorporation. This person or company must live in the state where you file your articles. They also must be easily reachable, so choose a registered agent who works regular business hours within your state.
- Confusing them with articles of organization. A corporation must file articles of incorporation, whereas an LLC must file articles of organization. Check your filing body’s website for the proper forms, and ensure you’re actually filing the forms that are relevant to your business type.
- Filing with the wrong government body. Some states require that you file articles of incorporation with the secretary of state’s office. Others require you to file with the state commerce department or another government body. Double-check that you’re filing with the correct office to avoid any problems or delays.
To open a business bank account , you’ll need your articles of incorporation along with an employer identification number and personal identification documents.
Can you change your articles of incorporation in the future?
Yes, you can change your articles of incorporation. Although the process may vary by state, it typically starts with filing a document called a certificate of amendment and paying a fee. What this document should detail also may vary by state, but you can start by including the following information:
- The names and titles of the people at your corporation who are certifying the changes (typically your board’s president and secretary).
- The article of incorporation you’re amending.
- Confirmation that your board has approved the amendment via a corporate resolution.
- Confirmation that the number of shareholders required in your articles of incorporation and/or operating agreement has approved the amendment upon a vote.
What’s the difference between an operating agreement and articles of incorporation?
An operating agreement (bylaws) is an internal document that defines how the business owners professionally relate to one another. The articles of incorporation (certificate of formation) is a public document that legally establishes a business as a corporation. Together, these documents help make up your organization’s legal framework.
Operating agreements and articles of incorporation also differ based on legal structure, obligation, state requirements, tax outcomes, comprehensiveness and rigidity. Operating agreements are often less formal and easier to amend.
“Articles of incorporation are filed as of the date of creation and are often not updated to include shareholder information, profit distribution methods or other ongoing business relations, whereas operating agreements can be more easily adjusted to stay current with the current state of operations,” Gauvreau said.
It is also crucial to understand that, although they serve a similar purpose, operating agreements differ slightly from a company’s bylaws. Operating agreements tend to outline items in greater detail than the bylaws of a corporation.
“In a corporation’s situation, it is very common to have additional agreements created, often referred to as a shareholder’s agreement, which outlines in greater detail the information that would typically be contained inside an operating agreement,” Gauvreau said.
What are the similarities between an operating agreement and articles of incorporation?
Operating agreements and articles of incorporation work hand in hand to outline your business structure and define how your company will legally operate. However, they do overlap a bit and have a few similar features. For example, both documents include necessary business information and have similar functionality and outlines.
The operating agreement and articles of incorporation “both present information about the business, such as the business name, purpose and how the business will operate,” Gauvreau said. “In addition, both documents define the ownership structure and are necessary for understanding the function of the business.”
It is wise for every LLC to create a written operating agreement and certificate of formation, and for every corporation to create bylaws and articles of formation. Keep in mind that filing these documents incorrectly can result in delays. To aid in the proper outlining and filing of these governance documents, it is recommended that you seek legal counsel for assistance.
Both operating agreements and articles of incorporation should include the business’s legal name and any DBA (doing business as) name .
Starting your business the right way
Launching a business involves more than opening your doors to potential clients or customers. It also means setting up formal internal protocols and registering with the government. These parts of forming a business can be tedious, but if you get them right the first time, you’re off to a great start.
Max Freedman contributed to the reporting and writing in this article. Some source interviews were conducted for a previous version of this article.
Creating an LLC Operating Agreement
An LLC operating agreement allows you to structure your financial and working relationships with your co-owners in a way that suits your business. In your operating agreement, you and your co-owners establish each owner’s percentage of ownership in the LLC, his or her share of profits (or losses) and his or her rights and responsibilities, as well as what will happen to the business if one of you leaves.
Why an operating agreement is necessary While many states do not legally require your LLC to have an operating agreement, it’s foolish to run an LLC without one, even if you’re the sole owner of your company. An operating agreement helps your LLC by guarding your limited liability status, heading off financial and management misunderstandings, and making sure your business is governed by your own rules — not the default rules of your state.
Protecting your limited liability status The main reason to make an operating agreement is as simple as it is important: It helps to ensure that courts will respect your limited personal liability. This is particularly key in a one-person LLC, where, without the formality of an agreement, the LLC will look a lot like a sole proprietorship. Just the fact that you have a formal written operating agreement will lend credibility to your LLC’s separate existence.
Defining financial and management structure Co-owned LLCs need to document their profit-sharing and decision-making protocols as well as the procedures for handling the departure and addition of members. Without a thorough operating agreement, not only will you and your co-owners be ill-equipped to settle misunderstandings over finances and management, but you will also be subject to the rules of your state law (see below).
Overriding state default rules Each state has laws that set out basic operating rules for LLCs, some of which will govern your business unless your operating agreement says otherwise (these are called “default rules”). Many states, for example, have a default rule that requires owners to divide up LLC profits and losses equally, regardless of each member’s investment in the business. Unless you and your co-owners invest equal amounts in the LLC, it’s doubtful you’ll want profits allocated this way. To avoid this, your operating agreement must spell out how you and your co-owners want to split profits and losses.
In this same way, many state laws regarding LLCs will not be favorable to your business. Don’t be tempted to rely on them to structure your LLC; instead, decide on the best rules for your situation and put them in a written operating agreement.
What to include in your operating agreement There’s a host of issues you must cover in your operating agreement, some of which will depend on your business’s particular situation and needs. Most operating agreements include the following:
- the members’ percentage interests in the LLC
- the members’ rights and responsibilities
- the members’ voting power
- how profits and losses will be allocated
- how the LLC will be managed
- rules for holding meetings and taking votes, and
- “buy-sell” provisions, which establish a framework for what happens when a member wants to sell his interest, dies or becomes disabled.
While these items may seem fairly straightforward, each is rife with details. Make sure you fill out the particulars in the following key areas.
Percentages of ownership The owners of an LLC ordinarily make financial contributions of cash, property or services to the business to get it started. In return, each LLC member gets a percentage of ownership in the assets of the LLC. Each member is usually given an ownership percentage that’s in proportion to his contribution of capital, but LLCs are free to divide up ownership in any way they wish. These contributions and percentage interests are an important part of your operating agreement.
Distributive shares In addition to receiving an ownership interest in exchange for his investment of capital, each LLC owner also receives a share of its profits and losses, called a “distributive share.” Most often, an operating agreement will provide that each owner’s distributive share corresponds to his percentage of ownership in the LLC. For example, because Tony owns only 35% of his LLC, he receives just 35% of its profits and losses. Najate, on the other hand, is entitled to 65% of the LLC’s profits and losses since she owns 65% of the business. (If your LLC wants to assign distributive shares that aren’t in proportion to the owners’ percentage interests in the LLC, you’ll have to follow rules for “special allocations.”)
Distributions of profits and losses In addition to defining each owner’s distributive share, your operating agreement should answer these questions:
- How much — if any — of the allocated profits of the LLC (the members’ distributive shares) must be distributed to LLC members each year?
- Can members expect their LLC to pay them at least enough to cover the income taxes they’ll owe on each year’s allocation of LLC profits?
- When will distributions of profits be made?
- Or are the owners entitled to draw periodically from the profits of the business?
Because you and your co-owners may have different financial needs and marginal tax rates (tax brackets), the allocation of profits and losses is an area to which you should pay particular attention.
Voting rights While most LLC management decisions are made informally, sometimes a decision is so important or controversial that a formal vote is necessary. There are two ways to split voting power among LLC members: either each member’s voting power corresponds to her percentage interest in the business or each member gets one vote — called “per capita” voting. Most LLCs mete out votes in proportion to the members’ ownership interests. Whichever method you choose, make sure your operating agreement specifies how much voting power each member has as well as whether a majority of the votes or a unanimous decision will be required to resolve an issue.
Ownership transitions Many new business owners neglect to think about what will happen if one owner retires, dies or decides to sell his interest in the company. These concerns may not be on your mind now, but such situations crop up frequently for small business owners, and it pays to be prepared. Operating agreements should include a buyout scheme — rules for what will happen when one member leaves the LLC for any reason. For more information, see Plan for changes in LLC ownership with buy-sell provisions .
How to create an operating agreement Obviously, you’ll need help beyond this article to make your own operating agreement. There are many sources for blank or sample LLC operating agreements, but you must be sure that your operating agreement is drafted to suit the needs of your business and the laws of your state.
Law libraries are a good source of state LLC law as well as technical material on preparing an operating agreement, but since the material is written for lawyers, you may find it more confusing than helpful.
You can pay a business lawyer for assistance, and in fact we recommend this for LLCs with more than five owners, or for those that opt to have a special manager or management group run the LLC. Lawyers typically have several types of standard agreements on hand that can be customized for your LLC.
If expense is an issue, software that helps you create your own LLC may be your best alternative. For example, LLC Maker (from Nolo.com) will use your input to customize an operating agreement that suits the needs of you and your co-owners and meets the requirements of your state’s laws.
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Basic Information About Operating Agreements
If you are seeking a business structure with more personal protection but less formality, then forming an LLC, or limited liability company, is a good consideration. Regardless of your business structure, some paperwork like an operating agreement is expected. Here are the basics every LLC owner should know about operating agreements:
What is an operating agreement?
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.
Why do you need an operating agreement?
- To protect the business' limited liability status: Operating agreements give members protection from personal liability to the LLC. Without this specific formality, your LLC can closely resemble a sole proprietorship or partnership, jeopardizing your personal liability.
- To clarify verbal agreements: Even if members have orally agreed to certain terms, misunderstanding or miscommunication can take place. It is always best to have the operational conditions and other business arrangements handled in writing so they can be referred to in the event of any conflict.
- To protect your agreement in the eyes of your state: State default rules govern LLCs without an official operating agreement. This means that each state outlines default rules that apply to businesses that do not sign operating agreements. Because the state default rules are so general, it is not advisable to rely on a governing body state to manage your agreement.
Tip: Consult with an attorney and accountant to assist with the financial and legal matters of your agreement.
What does an operating agreement entail?
Operating agreements are contract documents that are generally between five and twenty pages long.
What is included in an operating agreement?
The functionality of internal affairs is outlined in the operating agreement including but not limited to:
- Percentage of members' ownership
- Voting rights and responsibilities
- Powers and duties of members and managers
- Distribution of profits and loses
- Holding meetings
- Buyout and buy-sell rules (procedures for transferring interest or in the event of a death)
Are LLCs required to form an operating agreement?
The requirement of an operating agreement depends on the state in which it was formed. Many states do not require operating agreements. This information can generally be found on your Secretary of State website.
Tip: It is unwise to operate without an operating agreement even though most states do not require a written document. Regardless of your state's law, think twice before opting out of this provision.
Where should operating agreements be kept?
Operating agreements should be kept with the core records of your business. They are not required to be filed, nor will they be accepted by your state.
Tip: Operating agreements should be kept confidential.
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Ijeoma S. Nwatu is a digital strategy and communications consultant. She is the Communications Manager for ColorComm, an organization that aims to uplift women of color in the communications field. When not working with clients, Ijeoma can be found...
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What Is an LLC Operating Agreement?
How llc operating agreements work, benefits of an llc operating agreement, what to include in an llc operating agreement.
- LLC Operating Agreement FAQs
Types of Corporations
LLC Operating Agreement: Definition, Purpose, Format, Importance
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An LLC operating agreement is a document that customizes the terms of a limited liability company according to the specific needs of its members. It also outlines the financial and functional decision-making in a structured manner. It is similar to articles of incorporation that govern the operations of a corporation.
Although writing an operating agreement is not a mandatory requirement for most states, it is nonetheless considered a crucial document that should be included when setting up a limited liability company. The document, once signed by each member (owner), acts as a binding set of rules for them to adhere to.
The agreement is drafted to allow owners to govern the internal operations according to their own rules and specifications. The absence of an operating agreement means that your business has to be run according to the default rules of your state.
Key Takeaways
- An LLC operating agreement is a legal document that spells out the terms of a limited liability company to the members.
- It sets forth the path for the business to follow and brings in more clarity in operations and management.
- In some states, the operating agreement is required as part of establishing the business entity.
- LLC operating agreements have some boilerplate sections with standard language, but one size does not necessarily fit all.
- If an LLC does not have an operating agreement, it must be governed according to the default rules of that state.
An LLC is a type of U.S. business entity that is easy to form and simple to manage, and importantly limits the liability of owners. Since an LLC is a hybrid of a partnership and corporation, it provides the twin benefit of pass-through taxation with limited liability .
To take full advantage of having an LLC, you should go one step further and write an operating agreement during the startup process. Many tend to overlook this crucial document since it is not a mandatory requirement in many states. Only a few states specify the need to register an operating agreement when creating an LLC.
The operating agreement is thus a document that spells out the terms of a limited liability company (LLC) according to the members. It sets forth the path for the business to follow and brings in more clarity in operations and management. A typical LLC operating agreement is a 10- to 20-page contract document which sets up guidelines and rules for the LLC.
In states such as California, Missouri, and New York, it is mandatory to include this document during the incorporation process. While most other states do not insist on including it, it is always considered wise to draft an operating agreement, as it protects the status of a company, comes in handy in times of misunderstandings, and helps in carrying out the business according to the rules set by the members.
Businesses that do not sign an operating agreement fall under the default rules outlined by the states. In such a case the rules imposed by the state will be very general in nature and may not be right for every business. For example, in the absence of an operating agreement, some states may stipulate that all profits in an LLC are shared equally by each partner regardless of each party's capital contribution. An agreement can also protect partners from any personal liability if it appears they are operating as a sole proprietorship or a partnership.
An operating agreement, once signed, should be kept safely as an important record of the business.
Even if a business venture only has a single owner/employee, it can still be beneficial to codify the relationship with an LLC operating agreement. Having an operating agreement establishes a legal boundary between the LLC and the owner, so that the owner is not held accountable for the LLC's debts or liabilities. Otherwise, creditors to the LLC may pursue the owner's personal assets.
An operating agreement also allows the owner to codify the rules of succession for their business, as well as governance procedures such as meetings and voting. Without an operating agreement, ownership of the business is handled according to the state's default LLC rules.
There are many issues that must be covered in the LLC operating agreement. The general format of the document includes the following:
- Each member's ownership expressed as a percentage
- The members' responsibilities and voting rights
- A layout of the duties and powers of members
- The profit and loss allocation among members
- The rules related to holding meetings and taking votes
- The issues related to the management of the LLC
- Buyout and buy-sell provisions, when a member wants to leave and sell their share (should also include what will happen in the event of a member's death)
LLC operating agreements should also outline the specific definitions of terms used in the agreement, as well as list the purpose of the business, a statement of its intent to form, how it will handle new members, how it chooses to be taxed, how long it intends to operate, and where it is located.
Just as “one size doesn’t fit all,” the state default LLC rules don’t suit all. The best way to counter this problem is by writing an operating agreement, which gives freedom, protection, and control to your business. Though it's best to include an operating agreement in the initial stages, if you have missed on that, it’s never too late to put it in place, provided all members agree to it. The document can also be modified at a later stage with the guidance and help of an attorney.
If I Have an LLC Operating Agreement Do I Need a Business Plan?
There's no legal requirement for an LLC to have a written business plan, but there are still clear advantages to having one. A well-structured business plan is an important tool to set out the goals and values of an enterprise and provides an objective way of assessing whether or not those goals are being met.
Does an LLC Have Shares of Stock Like a Corporation?
No. While it is sometimes common to describe LLC membership as a "share," this is not the same as stock units in a corporation. While members of an LLC have the right to share profits and make decisions concerning their company, an LLC cannot raise money by issuing stock shares.
What Is the Difference Between a Partnership and an LLC?
A partnership is a comparatively simple vehicle for business relationships. Unlike an LLC, there is no requirement for formal paperwork: a partnership is considered to have formed whenever two or more partners go into business together.
Also, unlike an LLC, partners may be held personally liable for the partnership's business obligations–meaning that creditors may seek repayment from the personal assets of individual partners. In contrast, the members of an LLC are legally distinct from their business organization.
Can an LLC Operating Agreement Be Amended?
Yes, LLC operating agreements can generally be amended, but the procedures for doing so will vary. In most cases, the process of amending an operating agreement should be spelled out in the agreement itself: some LLCs might specify that they can only be amended by a unanimous vote of the members, or that they can only be amended in the fourth quarter of the year. It is even possible for an LLC to have an operating agreement that cannot be amended. If it is not clearly stated, the process for amending an operating agreement is determined by the default rules for LLCs in that state.
Does a Single Member LLC Need an Operating Agreement?
A handful of states require all LLC's to have an operating agreement, even if they have only one member. These include New York, Missouri, and California. In the other states, it is not required, but it is strongly encouraged, since they can protect the members from problems that the LLC may encounter.
Internal Revenue Service. " Taxation of Limited Liability Companies ," Page 2. Accessed Jan. 23, 2022.
The New York State Senate. " Section 417 ." Accessed Jan. 23, 2022.
Missouri Secretary of State. " Missouri Small Business Startup Guide ." Accessed Jan. 23, 2022.
California Secretary of State. " Starting a Business – Entity Types ." Accessed Jan. 23, 2022.
Nolo.com. " Why You Need an Operating Agreement ." Accessed Jan. 23, 2022.
UpCounsel. " Does an LLC Have Shares: Everything You Need to Know ." Accessed Jan. 19, 2022.
Nolo. " Partnership FAQ ." Accessed Jan. 19, 2022.
LegalTemplates. " Free Amendment to LLC Operating Agreement ." Accessed Jan. 23, 2022.
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- Business Plan
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A Business Plan is an essential outline document that is created by companies, small businesses, and start-ups to summarize their goals and properly plan out their future . They are very often used to win over potential investors and possible financiers.
Business plans carefully detail the company’s goals , strategy , and current structure amongst other features. It offers a quick and clear picture of what the organization is trying to achieve to present to potential stakeholders both inside and outside the company.
Read on below to find out why these essential planning documents are important for entrepreneurs and business managers. It also outlines the different types of structures you can use to organize a business plan and also what must be included in your final draft.
- Why to Use a Business Plan
A business plan can be a useful tool in the arsenal of a new business, or a company that is planning expansion. They can help to formulate guidelines for how an enterprise will operate, what it will achieve, and how it will finance itself.
The most important reason to use a business plan is to show that you and your company are a serious venture and that you have carefully researched its viability and strategy . This can be used to demonstrate to investors that you are worth financing or to help secure a suitable loan agreement.
However, beyond this, a business plan can also help companies internally decide whether their market strategy is sound. It can help managers and owners work out if their ideas will sink or swim and properly secure return on investment.
Read More : How to Write a Perfect Business Plan
- Types of Business Plan
No single business plan is like any other no matter the company or the industry. However, in most cases when starting out, writers will follow a more-or-less standardized template to organize all the most essential information. The most common types of business plans you may come across include the following:
- Standard Business Plan: A detailed document of around 10 pages in length which is organized into a number of essential sections that cover the most important features of a business.
- Lean Business Plan: A much shorter summary of a business’s intentions. It is often around one-page in length. It may be organized into a similar structure to a standard business plan or you might try an alternative style like a Business Model Canvas.
- What Should You Include in a Business Plan?
There is no definitive one-size-fits-all business plan model. How you structure your document will very much depend on your necessities and the people you wish to target. However, you should make sure to cover the most important parts of a business plan such as the following:
- Executive summary: A quick synopsis of the aims of the business plan.
- Company Description: This outlines what the company does, how it is managed and if operates as DBA , and where it sits in its market.
- Product or Service Description: A short summary of what the business produces.
- Market Analysis: A study of how the company measures up against its competitors, and the type of business model .
- Operating Plan: A description of how the company is organized to achieve its goals.
- Financial Planning : An explanation of how a company’s operations are costed and where its financing comes from.
This is not an exhaustive list of sections you could include in your business plan. However, it covers the most important details you should include to win over a possible partner or investor .
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Operating Agreement
Jump to section, need help with an operating agreement, what is an operating agreement.
An operating agreement is a legally binding document that limited liability companies (LLCs) use to outline how the company is managed, who has ownership, and how it is structured. If a company is a multi-member LLC , the operating agreement becomes a binding contract between the different members. In addition to clarifying ownership and structure, the operating agreement can also name the registered agent, give details like when meetings are held, select managers, and explain how the business can add or drop members. Simply put, the operating agreement outlines a business's functional and financial decisions. Once the members of the LLC sign it, they are officially bound to its terms.
Most operating agreements contain six key sections, including:
- Organization
- Management and voting
- Capital contributions of members
- Membership changes
- Distributions
- Dissolution
Why You Need an Operating Agreement
There are several reasons why you need an operating agreement, including:
- Clarifies verbal agreements: The LLC operating agreement puts all agreements between the managing members in writing, so there are no misunderstandings. Members can then refer back to the operating agreement in the event of conflicts in the future.
- Protects members from personal liability: The operating agreement is a formality that protects the managing members from being personally liable.
- Ensures you aren't subject to default state rules: When a business doesn't have an operating agreement in place, the default rules set by the state will apply. For example, states have default rules that require the company to divide profits and losses equally. To avoid having to rely on your state's basic operating rules, you should have an operating agreement in place.
Read more about an LLC with partners .
What to Include in Your Operating Agreement
There are a wide number of topics that you should address in your operating agreement. Some of these will depend on the needs of your business and your particular situation. However, most operating agreements should include:
Members' Percentage of Ownership
The owners of a company usually make contributions of services, cash, or property to get a business up and running. Typically, they receive a percentage of ownership that's proportionate to the capital they contributed when starting the business. That said, members are welcome to divide ownership any way they like. However, ownership percentages should be clearly defined in the operating agreement.
Distributive Shares
Distributive shares refer to the sharing of profits and losses. Oftentimes operating agreements will allocate distributive shares in the same way as the percentage of ownership. For example, if you own 25% of a business, you would then receive 25% of the profits and losses. However, you don't have to follow this rule. You could give an investor 25% ownership of a business but only assign them 10% distributive shares. That said, if you do choose to assign distributive shares that aren't in proportion to the ownership percentages, you will still have to follow the rules for special allocations.
Allocation of Profits and Losses
Your operating agreement should also clearly define how much of the allocated profits should be distributed to members every year. It should also answer whether the members can expect the business to pay them enough to cover the cost of the income taxes they will owe on profits. In addition, it should articulate whether the owners are allowed to draw money from the business's profits at will or whether distributions will be made regularly.
Voting Rights
The operating agreement should also explain how you will handle voting on major decisions. For example, will each member have one vote, or will each member have voting power that corresponds to their ownership percentage?
Transitions in Ownership
It's important to have a plan in place that is clearly articulated in the operating agreement for how you will handle situations if one of the members decides to retire, passes away, or wants to sell their interest in the company. Your operating agreement should include rules for what will happen if a member decides to leave for any reason.
Learn how to get an LLC .
See Operating Agreement Pricing by State
- Connecticut
- District of Columbia
- Massachusetts
- Mississippi
- New Hampshire
- North Carolina
- North Dakota
- Pennsylvania
- Rhode Island
- South Carolina
- South Dakota
- West Virginia
How Operating Agreements Work
Because an operating agreement spells out an LLC's terms according to the members, it's a good idea to create one during the startup phase of your business, as it brings in clarity for future management and operations. While operating agreements aren't mandatory in all states, it's a good idea to have one, since it protects the company, prevents future misunderstandings between owners, and establishes rules for how you will run the business. Once the operating agreement is complete and signed by all members, it should be kept in a safe location to refer back to as necessary.
Explore some of our LLC Operating Agreement lawyers .
Operating Agreement vs. Articles of Organization
Both of these are important documents when you're starting an LLC. However, the Articles of Organization , also referred to as the Certificates of Organization , are filed with the state to register it as a legal business entity. The operating agreement is an internal document. While it's legally binding in the same way that the Articles of Organization are, it doesn't need to be filed with the state.
Basic Provisions in an Operating Agreement
Most operating agreements include the following basic provisions:
- Name of the LLC: The operating agreement should always include the name and address of the registered office and business office.
- Statement of Intent: This states that the agreement is in accordance with state laws and comes into existence when the official documents are filed.
- Business purpose: This statement defines the business's purpose, including the nature of the business, and often includes a statement like "and for any other lawful business purpose" to cover the business in the event of future changes.
- Term: This states that the business will continue until terminated or dissolved according to state law.
- Tax treatment: This articulates how the business will be taxes, whether by a partnership, sole proprietorship, or corporation.
- New members: This outlines how a potential new member could acquire an interest in the business.
Other Types of Provisions
There are some other types of provisions that companies commonly include in operating agreements, including:
- Identification of managers and members: This lists the names, titles, and addresses of the initial members and any managers if there are any.
- Capital contributions: This lists the initial capital that each member contributes and what the value is.
- Additional capital contributions: This states whether members are allowed to make additional contributions and whether it's required.
- Member meetings: This outlines when meetings will be held and any rules that apply in meetings.
- Dissolution: This provides procedures and conditions for dissolving the business.
While the provisions and topics presented above are the major provisions that companies tend to include in their operating agreements, the list is by no means exhaustive. Because it's a document made specifically for your company to address circumstances you anticipate encountering, you can essentially include anything you want. For example, you could include restrictions on who is allowed to sign a check or how disputes will be resolved.
It's also important to keep in mind that the operating agreement, while legally binding, can be changed at any time through the process of your choosing. That means that as the company grows and changes, you can make changes as necessary to meet the needs of the business and its members.
There are a lot of practical, legal, and even tax considerations that you may want to consider as you're tailoring your operating agreement for your business's needs.
Meet some of our Operating Agreement Lawyers
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Lawrence A. “Larry” Saichek is an AV rated attorney and a CPA focusing on business and real estate transactions, corporate law and alternative dispute resolution. With a background including five years of public accounting and six years as “in house” counsel to a national real estate investment company, Larry brings a unique perspective to his clients – as attorney, accountant and businessman. Many clients think of Larry as their outside “in house” counsel and a valued member of their team. Larry is also a Florida Supreme Court Certified Mediator and a qualified arbitrator with over 25 years of ADR experience.
David H. Charlip, the principal of Charlip Law Group, LC, is one of only 101 Board Certified Civil Trial Lawyers in Miami-Dade, with over 40 years of litigation experience. Mr. Charlip is also one of only 136 Florida Civil Law Notaries. He is also a Florida Supreme Court Certified Circuit Civil Mediator and a Florida Supreme Court Approved Arbitrator. He has managed and litigated cases across the country. Mr. Charlip has advised businesses, drafted business formation and purchase and sale documents and litigated business disputes for over 40 years and is very familiar with all aspects of contractual relations.
With over 16 years of experience in the area of estate planning, trademarks, copyrights and contracts, I am currently licensed in Florida and NJ. My expertise includes: counseling clients on intellectual property availability, use and registration; oversee all procedural details of registration and responses with the USPTO/US Copyright Office; negotiate, draft and review corporate contracts and licensing; counsel clients on personal protection, planning and drafting comprehensive estate plans.
Melissa Taylor, the President and founding partner of Maurer Taylor Law, specializes in business contract review and drafting and is a second-generation attorney with private firm, in-house counsel, governmental, entrepreneurial, and solo practitioner experience. Melissa has a strong legal background, a dedication to customer service, is friendly, warm and communicative, and is particularly skilled at explaining complex legal matters in a way that's easy to understand. Melissa personally handles all client matters from start to finish to ensure client satisfaction.
Entertainment Attorney with 30+ years of experience, representing all aspects of the TV, Film, Music and Publishing Industries
Aaron focuses his practice on entrepreneurs and emerging growth companies, providing general counsel services for companies from formation through exit. Aaron frequently advises clients in connection with routine and unique legal, business, and strategic decisions, including corporate, business and technology transactions, angel and venture financings, mergers and acquisitions, protection of intellectual property, and information privacy and data security.
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Operating Agreement Vs. Articles of Incorporation
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Key Documents Needed for the Formation of a Partnership
How does ownership in an llc work, what is a corporation charter.
- What Is the Difference in an LLC & Owner/Proprietor?
- About Business Organizational Structure
Some corporate structures are required to create legal documents that outline basic information about the business, such as the purpose of the organization or how the company will operate. For corporations, this legal document is called the articles of incorporation. An operating agreement is the document used for a limited liability company. Each document has certain similarities as well as differences in how they are used by each business structure.
The SBA describes an operating agreement for an LLC as providing more personal protection with a less formal structure. Articles of incorporation provide a more formal structure of protection and offer certain tax benefits.
Is an Operating Agreement the Same as Articles of Incorporation?
The articles of incorporation legally establishes a business as a corporation in the state in which it operates. The articles are necessary to define the corporation's business activities, the name of the owners, as well as information related to the issuance of company stocks. Articles of incorporation should not be confused with bylaws, which outline the roles, duties and regulations that will govern the corporation. Both the articles of incorporation combined with bylaws form the basic legal structure of a corporation according to Business News Daily .
An operating agreement is an agreement between the members of a limited liability company that describes how the company will carry out business obligations. The agreement is necessary to avoid the default rules of state limited liability company statutes. Business owners use an operating agreement to organize the rules of the company and the responsibilities of its owners. Bylaws are not legally required for limited liability companies. Limited liability companies typically have no use for bylaws outlining regulations about managing shareholders, officers or directors, according to LegalZoom .
What is the Legal Significance?
Operating agreements and articles of incorporation are both legally significant. For articles, they are a legal requirement for corporations and exist as a public record to identify the company. Operating agreements are legally binding in the event legal matters arise between business owners. When an operating agreement is in place, courts will respect its provisions and allow the owners of the LLC to make formal decisions concerning the company.
How are Operating Agreements Similar to Articles of Incorporation?
Operating agreements and articles of incorporation share similarities in their form and function. Both documents present similar information about the respective business, such as business name, purpose and how the business will operate. Also, each document defines the ownership and management of each structure. Both documents are necessary for each business structure to function optimally in the business community.
How do Operating Agreements Differ From Articles of Incorporation?
Corporations are required by law to file their articles of incorporation with the secretary of state or similar business filing authority. The articles register the business as a separate entity from its owners. Limited liability companies, on the other hand, are not always required by law to have an operating agreement or file the agreement with the business filing authority. Each state differs in which forms LLCs must file with its organizational paperwork.
Limited liability companies rely on operating agreements for a different purpose than corporations use their articles. Operating agreements are more comprehensive in describing management plans, voting rights, and profit and loss allocations. For corporations, these key points are outlined in corporate bylaws and not the articles of incorporation.
What Might Happen if Documents Get Filed Incorrectly?
Missing or inaccurate information within an operating agreement or articles of incorporation can seriously effect how the business operates as well as leave the business vulnerable to legal trouble. If a corporation files the articles incorrectly, the document can be rejected, delaying the formation of the company. An operating agreement that is organized poorly can lead to conflict between owners. Without instructions on how to resolve disagreements, business owners may need to resort to litigation to settle disputes.
- Articles of Incorporation: What New Business Owners Should Know
- Basic Information About Operating Agreements
- Do LLCs Have Bylaws or Operating Agreements?
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What is an LLC Operating Agreement?
An LLC Operating Agreement is a legal document that outlines the ownership and member duties of your Limited Liability Company . This agreement allows you to set out the financial and working relations among business owners ("members") and between members and managers. Your operating agreement should be created as soon as you form an LLC .
All LLCs should have an operating agreement . This article will further detail what an LLC operating agreement is, how they work, and how to get one for your business for free.
What is in an Operating Agreement?
The form and contents of operating agreements vary widely, but most will contain six key sections: Organization , Management and Voting , Capital Contributions , Distributions , Membership Changes , and Dissolution .
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Use our guides below to learn about LLC Operating Agreements in your state:
- Connecticut
- Massachusetts
- Mississippi
- New Hampshire
- North Carolina
- North Dakota
- Pennsylvania
- Rhode Island
- South Carolina
- South Dakota
- Washington D.C.
- West Virginia
Article I: Organization
The first section of the operating agreement deals with the creation of the company. It covers when the company is created, who the members are, and the structure of ownership. If there are multiple members, they may all have equal ownership or different amounts of "units" of ownership.
Article II: Management and Voting
This section addresses how the company is managed and how the members vote.
- The company may be managed by the members or by one or managers that are appointed by the members, and the operating agreement specifies what authority the members or more have over company affairs.
- The company may choose to make decisions though a voting process. Votes may be allocated among the members in any number of ways, including one vote per member, one vote per unit of ownership interest (if the company ownership is described in terms of units), etc. The operating agreement may specify what amount of votes is required for particular actions by the company.
Article III: Capital Contributions
This section covers which members have given money to start the LLC. It also discusses how additional money will be raised by members. For example, an LLC can choose to issue ownership "units" in exchange for money.
Article IV: Distributions
This section provides how the company's profits and losses are shared among members. This might include money, physical property, or other business assets.
Article V: Membership Changes
This section describes the process for adding or removing members. It also states if and when members can transfer their ownership of the company. For example, the company will want to specify what happens if a member dies, a member goes bankrupt, two members divorce, etc.
Article VI: Dissolution
This section of the operating agreement will explain the circumstances in which the company may be or must be dissolved. This is sometimes called “winding up” the affairs of the company.
Other Topics
In addition to these six key sections, operating agreements may address any number of other topics. This depends on circumstances of a particular company. For example, members may wish to include requirements for periodic meetings, restrictions on check signing, or explain how disputes within the company will be handled. Keep in mind that, once you start a business , your operating agreement can be updated at any time through a process of your choice.
Create a Free Custom Operating Agreement
Use our free, easy-to-use tool to create a custom operating agreement for your LLC.
Features of the tool include:
- Single-member or multiple-member LLCs
- Member-managed or manager-managed LLCs
- Ability to add custom sections and clauses
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Do I Need an Operating Agreement?
LLC's in California, Delaware, Maine, Missouri, Nebraska, and New York are legally required to have an operating agreement.
Even if an operating agreement is not required in your state, it is strongly recommended to have one:
- If you have business partners (Multi-Member LLC): An operating agreement will help prevent misunderstandings by setting clear expectations about partner roles and responsibilities.
- If you are the sole owner of an LLC (Single Member LLC): Creating an operating agreement brings credibility to your LLC. Having an operating agreement in place also helps to ensure courts uphold the limited liability status of your LLC.
After Completing the Operating Agreement
Once you have finished your operating agreement, you do not need to file it anywhere. However, there are few states that require LLCs to file initial reports and/or publish notice of their formation. Check your local laws to verify your state’s requirements. In most states, you can find information about requirements for LLC formation on the Secretary of State’s website.
It is a good idea to keep a file or binder to hold important documentation for your LLC, including your operating agreement. Keep a copy of the operating agreement for your records and give copies to the members of your LLC.
Following any major company events, such as adding or losing a member, it is a good idea to review and consider updating the operating agreement. An operating agreement can always be amended with the consent of all current members.
Completing the operating agreement is just one of the things that you need to do after forming an LLC. If you haven’t done so already, consider doing the following if it applies to your business:
- Get an EIN . If you are planning on hiring employees or opening business bank accounts, you will need an Employer Identification Number (EIN). Check out our What is an EIN article to learn how to get one for your business.
- Get a business bank account . As you are learning how start your business , it is important to maintain your business’ corporate veil to protect your personal assets if your LLC is sued. One of the major steps you need to take is separating your personal assets from your business - something you can accomplish by conducting all your business transactions through a business bank account .
- Register your LLC for state taxes . Tax requirements vary by state and sometimes by the nature of your business. If you are selling physical products, you will probably need to register for sales & use tax. If you are hiring employees, you will probably need to register for unemployment insurance tax and employee withholding tax.
- Set up an accounting system . Whether you hire a certified public accountant to do it on your own, you need to create an accounting system for your business to keep track of your business’ finances - including bills, expenses, and income.
- Obtain licenses and permits . Your business may be required to get certain licenses and permits , depending on the nature of your business, state laws, and local laws.
- Get business insurance . Almost every business should get business insurance . Whether it’s general liability insurance , a business owner’s policy, or workers’ compensation coverage, you need to make sure your assets are protected in any situation.
Questions About Operating Agreements:
Do you need an operating agreement.
It is highly recommended that all LLCs have an operating agreement. There are six states that legally require LLCs to keep an operating agreement: California, Delaware, Maine, Missouri, Nebraska, and New York. Even if you aren’t in one of those states, creating this document has lots of benefits, and no real downsides, especially since you can have one created for free .
What is the purpose of the operating agreement?
This agreement allows you to set out the financial and working relations among business owners and between members and managers. It determines how decisions within the LLC can be made, ownership stakes, voting rights, and many other structural features of the LLC.
Do you need an operating agreement for a single-member LLC?
If you are in one of the six states that require an operating agreement (California, Delaware, Maine, Missouri, Nebraska, New York) then you are required by law to have an operating agreement. Though single-member LLCs are generally more simple in structure than multi-member LLCs, they still can come into situations where having an operating agreement saves them from hassle and headache.
How do I write an operating agreement?
The simplest way to write an operating agreement is to use our free operating agreement tool . This tool allows you to create the document in an easy to use question and answer format. The end result is a properly written operating agreement that you can use for either a single-member or multi-member LLC.
We also provide a free LLC operating agreement template PDF if you don’t wish to use the customizable tool.
If neither of these solutions works for you, sitting with a business attorney in your state to write up this document is another option.
What needs to be in an operating agreement?
An operating agreement should have all of the information in the six articles mentioned at the beginning of this guide. These articles include management, voting, membership, capital contributions and more.
How much does an operating agreement cost?
Creating an operating doesn’t cost anything if you use a service like our operating agreement tool . If you choose to use an attorney to help you create this document, the price could be anywhere from an hourly rate to a flat fee somewhere around $600 or more.
Who signs an operating agreement?
Every member of the LLC and the manager or managers (if there are any) need to sign the operating agreement. Each signatory should sign a separate signature page. Be sure to sign the document in the proper way to best protect your corporate veil. Learn how to properly sign business documents on your state’s LLC formation page.
Does an operating agreement show ownership?
The operating agreement outlines who owns the LLC and what percentage of ownership each party has. Most of the time the members of an LLC will own a percentage relative to the contribution they made to the formation of the business, such as cash investments, but you can divide up ownership however you like.
What is the difference between bylaws and an operating agreement?
Bylaws are the internal governing documents for a corporation. Operating agreements are similar, defining the internal operating procedures of an LLC. The main difference is that bylaws are created for a corporation and operating agreements are created for an LLC.
What do you do with an operating agreement?
Although there are a few states that require you to have a written operating agreement, there are actually very few if any legal requirements for what you have to do with the document once you have created it. It is a good idea to file your operating agreement with other important business documentation so you can access it when you need it for reference or to make changes in the future.
Does an operating agreement need to be notarized?
There is no requirement that the operating agreement is notarized. Even without being notarized, the document is still considered legally enforceable among the parties. However, some businesses will still have the signatures notarized to make things “feel” more official.
Do I need an operating agreement to open a bank account?
You may or may not need an operating agreement to open a bank account. It depends on the bank’s policies and the laws of your state. Since it is relatively easy to create an operating agreement - and free to do when using our tool - you might as well create an operating agreement before trying to open a business account.
Can an LLC operating agreement be changed?
An LLC operating agreement can be changed - in fact, it should be updated if any major changes occur with the company that the operating agreement covers. If members change, ownership percentages change, or some other factors are altered that are referred to in the operating agreement, it is important to update the agreement to reflect those changes.
What if an LLC has no operating agreement?
Every LLC should have an operating agreement to help avoid legal trouble. There are a variety of risks you face without an operating agreement, including:
- You are damaging your corporate veil. Your limited liability status protects you in court. If you are a single-member LLC and you don’t have an operating agreement, the court could fail to take your limited liability status seriously and decide that you are a sole proprietorship.
- Your ownership and management structure could face trouble. The operating agreement puts down in writing the agreement between you and the other owners - including who owns what, who is responsible for what, and who gets paid and how much. One or more owners could forget - accidentally or purposefully - this agreement and act against your interests. If you do not have an operating agreement you will not have any documentation to prove the terms of the original agreement you made with your partners.
- Your business could be subject to state default laws. Many states have default laws about how an LLC must operate. Without defining how your LLC will operate in an operating agreement, you could be forced to adhere to the state’s laws - whether you like them or not.
- Basic Information About Operating Agreements - SBA.gov
- Key Documents Needed When Forming an LLC - SBA.gov
Related Articles
How Do I Pay Myself From My LLC?
Management by Members of Managers
Single-Member LLC Taxes
Multi-Member LLC Taxes
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