Operating Agreement

Operating Agreement

All limited liability companies should have Operating Agreements. This is one of the key documents that you should create during the formation process as it outlines the duties, rights, and obligations of the managers and members of the LLC. This is important since LLCs act via the managers, members, and agents, when properly appointed. Each of those roles must have clear responsibilities for accountability and clarity. Many states do not actually require LLCs to have their Operating Agreement, but it is still a very smart decision to create one.

The Bank May Require One

Although your state may or may not require your LLC to create and submit an Operating Agreement, it is relatively common for banks to require them as part of the account-opening process. This is not a given, but you do not want to find that your LLC cannot open an account at a certain bank just because you lack your Operating Agreement.

Important Even for Single-member LLCs

There are several types of LLCs, including those with just a single member. In the case of a single-member limited liability company, you may feel that an Operating Agreement can be skipped. After all, it is essentially a contract that you make with yourself. Even so, an Operating Agreement can be key for single-member LLCs. Not only will it assist you when opening a bank account, as mentioned, but it will also play a role if you die unexpectedly.

Provisions for transfer upon death are a key part of any single-member LLC’s Operating Agreement. It is common for LLC members to want their family members to inherit at least a portion of their company upon their death. Unfortunately, unless this is explicitly stated, it will not always happen as you hope it will. To avoid complications, you can create an Operating Agreement that includes provisions for your death.

There are also some other options available for transferring the LLC to your family upon your death. You can opt for the probate process, which is time-consuming and not the most cost-effective option. Or you can create your transfer testament or set up a trust. The same professionals that help you craft your Operating Agreement and form your LLC can assist with this aspect as well.

Operating Agreements for Multi-member LLCs

The reasons to create an Operating Agreement are even more evident in the case of an LLC with multiple members. In this case, it will serve a number of very important roles.

Your Operating Agreement is used to outline the ownership percentages. You must have your members agree to their chosen level of contributions in writing. Without this step, there is no legal recourse if a member does not meet that contribution.

Additionally, the Operating Agreement will clearly outline the actions that managers can complete and which ones require approval from members. This lets you ensure that the managers cannot unilaterally make decisions affecting the whole LLCs. Common situations where LLCs require member approval for management actions include signing contracts, assuming loans, and selling or buying assets.

Having members sign an Operating Agreement can also ensure that sensitive information is never shared. Without the agreement, there would theoretically be no restrictions on sharing that information.

Finally, you may want to include restrictions on changing ownership in the Operating Agreement. There are many reasons you may want to include a clause like this, including the ability to avoid giving third-party voting rights to an unknown.

If the idea of crafting your Operating Agreement is overwhelming, you can find templates online or hire a professional for assistance.

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