What Is an Operating Agreement?

An Operating Agreement is a formal statement that outlines the roles of the limited liability company's management and its day-to-day and long-term strategy. Alternate Names: LLC Operating Agreement; Partnership Operating Agreement. The purpose of this document is to confirm the owners have limited liability and their assets and debts are separate from the business, outline the current and upcoming operations of the company, explain what to do in case the business owner passes away or is incapacitated so that they are unable to make crucial decisions for the business, and prepare a set of rules the entity will follow in accordance with its financial state to avoid complying with default regulations and laws enacted by the state.

Do I Need an Operating Agreement for My LLC?

While certain states require every limited liability to create and maintain an updated version of the basic LLC Operating Agreement, most states do not ask business owners to set out the hierarchy of the company in writing explaining how the entity will determine its policy and vote on the most important matters that impact the future of the organization. However, even if there is no legal requirement to write a document of this kind, you should consider the benefits of this agreement: you will need guidance regarding the choices your company makes and procedures to follow whenever there is a major disagreement between the members of the LLC and the management. There will be no need to submit an Operating Agreement with any local or state authorities; however, it may come in handy whenever you are negotiating with potential business partners or suppliers that might want to learn more about the way your business works.

What Does an Operating Agreement Look Like?

Usually, an LLC Operating Agreement template contains the following sections: Mission statement of the company . List the name of the business, its contact details , and the goals the entity is planning to pursue. Describe the business type you have chosen, indicate the categories of goods and services you are going to provide, and mention the jurisdiction you subject the organization to. Ownership of the LLC . Name the owners, outline the distribution of capital and shares, and prepare to deal with the sudden passing of the owner or the decision of several members to leave the business. Management of the entity . It is crucial to include several sentences that illustrate the hierarchy of the LLC and determine who answers to whom in your business. You may have to act quickly, so it is important to have a precise protocol in place. Meetings of the LLC owners and the voting process . It is required to know how the major decisions of the company will be made - include the amendment procedures for the Operating Agreement in question. Moreover, you have to describe the potential dissolution of the entity.

How to Create an Operating Agreement?

To establish the framework and the governing structure of the LLC, one or several members of the company need to prepare a simple Operating Agreement that will include the main information about the entity in question. You should consider working on this legal instrument before your first transaction or contact with a business partner to know the foundation you are standing on. It is recommended to request the presence of all the limited liability company members at the meeting that allows the business to draft and approve several documents that define the future of the company. Every person involved in making a decision of this magnitude will be allowed to vote on the definitive draft of the Operating Agreement template - as a rule, it is necessary to secure the majority of votes to document how the company is going to be run.

How Much Does an Operating Agreement Cost?

If you are making your first steps on the market or inheriting the business from a more experienced individual, you may need to consult a lawyer who will help you to create an Operating Agreement from scratch. Since this document is essential for any company, at a minimum, you should reach out to a lawyer that will review the document you prepare on your own. Depending on your location, the cost of the Operating Agreement may vary from $500 to $1.000. It will cost less if you compose the document yourself, and the lawyer spends some time pointing out the flaws in your writing - however, make sure to find out whether they bill their services using an hourly rate or ask for a flat fee.

How to Amend an Operating Agreement?

It is quite simple to change the terms and conditions the Operating Agreement contains. To modify the text of the document, you need to propose an amendment and ask the members of the limited liability company to express their opinion about your ideas and vote following the procedures established by the original agreement. If the majority of members vote in favor of the amendment, you are allowed to draft a resolution - every member must sign this document before it is added to the internal records of the business. Do not forget to amend other documents if necessary - for instance, if you add a new LLC member, you may need to change the articles of incorporation.

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