The Necessity of Operating Agreements in LLCs

We've come across numerous property owners who transact through their LLCs. But what surprises us? Many single-member, and sometime multi-member, LLCs don’t possess an operating agreement. Let’s break down why these agreements are paramount for a seamless business experience.

An LLC’s operating agreement delves deep into critical facets: members' roles, voting dynamics, profit distribution, and meeting guidelines. Commendably, many amongst you maintain meeting minutes - an underappreciated practice.

At its core, forming an LLC aims at mitigating personal liability while enjoying tax perks. But it's essential to manage risks, which can't be eliminated entirely.

Why Every LLC Needs an Operating Agreement

1. Define the Management Structure: The agreement outlines how the LLC will be managed, whether it is member-managed (by the owners) or manager-managed (by appointed managers).

2. Clarify Member Contributions: It specifies what each member contributes to the LLC, be it capital, assets, expertise, or other forms of contributions.

3. Outline Profit and Loss Distribution: The agreement stipulates how profits and losses will be allocated among members. This doesn't necessarily have to be proportional to their equity in the company.

4. Set Rules for Membership Changes: The operating agreement can determine how members can sell or transfer their ownership stakes, what happens upon a member's death, or how new members can be added.

5. Provide Dispute Resolution Mechanisms: The agreement can set forth procedures for resolving disagreements among members.

Protect the LLC's Limited Liability Status: By clearly defining the roles and responsibilities of members, the agreement helps ensure that the LLC's members maintain their limited personal liability.

1. Overrule Default State Rules: In the absence of an operating agreement, state default rules will govern many aspects of the LLC. An operating agreement allows members to customize their operational and governance arrangements.

2. Establish Voting Rights and Procedures: The agreement can dictate how decisions are made, whether certain decisions require a simple majority or a unanimous vote, and how voting power is distributed.

3. Delineate Roles and Responsibilities: It can specify the duties, powers, and obligations of each member or manager.

4. Provide Dissolution Procedures: The agreement can lay out the process for winding down the LLC's affairs if it needs to be closed or dissolved.

If you're looking to obtain an operating agreement, here are some options:

1. Hire an Attorney: Consulting with a business or corporate attorney, especially one who specializes in LLCs for your specific industry, is the most reliable way to get a tailor-made operating agreement. They can draft one that specifically fits the needs

and complexities of your business.

1. Online Legal Services: There are numerous online platforms like LegalZoom, Rocket Lawyer, and Nolo that offer template operating agreements. Some of these platforms allow for a degree of customization based on your LLC’s specifics.

2. State Websites: Some states in the U.S. provide basic operating agreement templates on their Secretary of State or similar department websites. While these are often very generic, they can serve as a starting point.

3. Business Development Centers: Local small business development centers or chambers of commerce often provide resources or can guide you to where you can find operating agreement templates.

4. Law Libraries: University or public law libraries may have resources or templates available for creating operating agreements.

Remember, even if you start with a template, it's a good idea to have an attorney review the agreement to ensure it's comprehensive and complies with local and state laws.