An LLC Operating Agreement is a legal document setting out the ownership as well as members duties of an LLC. It is a very important document to have and every LLC should have one.
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What is the purpose of an LLC operating Agreement?
The purpose of an Operating Agreement is to set out the financial structure and working relationships between the owners, members and managers of the LLC. The key function of an Operating Agreement is to set out the rules, provisions and regulations of the LLC. This document governs and regulates the internal operations of the business as the owners would want it.
Does my business need an LLC Operating Agreement?
Most definitely YES, all LLCs need an Operating Agreement. In many states it is required to have an Operating Agreement. If your state does not require it, it would still be important to have an Operating Agreement. The benefits of an Operating Agreement when there are multiple members in the LLC is that it eliminates and prevents misunderstanding, and it clearly sets out the expectations of the members. For a single member LLC an Operating Agreement would give the business credibility and would help in legalities.
What is in an Operating Agreement?
Operating Agreements take on various structures and can be changed the way the owners want it. However there are six key sections that are in all LLC Operating Agreements. Below we explain the six sections that are integral to an Operating Agreement template.
Article I: Organization
This article needs to describe everything pertaining to the organisation like when it was formed, who the members are and how are their shares distributed, either equally or in percentages..
Article II: Management and Voting
This section needs to specify who will manage the company, either an appointed manager or one of the members can manage the company. It needs to specify what powers will lie in the manager and the members of the company. One will also need to specify how decisions will be made by way of voting. Each member can have one vote or one vote per unit owned of the company. It should also specify what the minimum voting percentage is for decisions to pass.
Article III: Capital Contributions
In this section, it should be specified which member gave money to start the LLC and how members will be raising money for operating costs.
Article IV: Distributions
This article one should provide how profits and losses will be distributed between the members.
Article V: Membership Changes
The process of adding and removing members should be stated in this section. It should also clearly state how and when members can transfer their units or ownership of the LLC. it needs to set out what will happen when a member dies, divorces or is declared bankrupt.
Article VI: Dissolution
In this section, describe how and when a company will be dissolved, and how the dissolution will take place.
An LLC operating agreement can be updated at any time. Other information owners might want to add would be how disputes are settled within the company, if and when there should be meetings as well as who may sign off on checks.
How do I create a custom Operating Agreement?
Hiring a lawyer to draw up an Operating Agreement can cost anything between $350 – $1000 for a single-member LLC, and anything between $750 – $5000 for a multi-member LLC. it might be beneficial to look at a free template option first. There are a few resources one can use when drawing up your own LLC Operating Agreement. TRUiC offers a free online tool where business owners can create and set up their own Operating Agreement as well as how to use the Operating Agreement when it is done. On this tool there are loads of free Operating Agreement templates to work from and get some ideas.