Since forming your LLC, how many times have you asked yourself,“Do I really need that for my business?” or“Is it necessary to do this right now?”
With a never-ending to-do list, a limited budget, and a growing company, it’s vital that you handle business necessities first. When it comes to an Operating Agreement, you may wonder if this is a necessity or simply a paper-pushing scheme.
As an LLC, there are two documents you want to ensure you have: your Articles or Organization and your Operating Agreement.
The exact details for your Articles of Organization vary from state to state, but it’s simply an article including information on what your company is and does, how it will be managed, and who runs it. The operating agreement, not required by the state, serves as a manual for handling questions of business management.
If an Operating Agreement is not required by the state, how important can it be? Let’s discuss!
What is an Operating Agreement?
An operating agreement is an essential document that all limited liability companies should have. The operating agreement outlines all of the company’s business operations and management.
An Operating Agreement is often referred to as a membership agreement because it establishes the obligations and liabilities of all the members listed under the LLC.
Why Do You Need an Operating Agreement?
No state actually requires you to file an Operating Agreement with the state, but several states require that you create an Operating Agreement for your records. Texas does not require an Operating Agreement at all, but as mentioned above it’s one of the most important documents you can have when forming an LLC – and for several reasons, such as:
- Protect businesses limited liability status
- Clarify Verbal Agreements
- Protect Agreement in eyes of the state
- Banks and investors may require this document before approving a loan
Information to Include in an Operating Agreement
Operating Agreements that are typically between 5 to 20 pages long – depending on the details you want to provide. The sections are broken down into categories like: Equity Structure, Management, Restrictions of Transfer, and Liquidation and Dissolution.
Aside from the introductory information such as the name of the LLC, articles of organization, and name and address of the registered agent, there’s also additional information to include in an Operating Agreement.
- Member’s ownership – Name, location, and purpose of your LLC needs to be stated, as well as the registered agent.
- Responsibilities – Which members are responsible for doing which tasks? This is important to have in writing in case things get messy later on.
- Contributions – Which members contribute and how much? Also include a breakdown of the ownership percentage of each member.
- Profit Distributions – you’ll want to clearly state how all profits and losses are accounted for and distributed.
- Procedures of transferring interest– What are the buyout and buy-sell rules or in the event of a death of a member, what happens?
- How to add new members – If there are several members, you need to have an agreement on how to potentially add new members later on.
- How taxes are allocated and distributed– Include how members report their share of the LLCs profits on their tax return.
- How decisions are made among members– It needs to be written down how decisions are made, details about meeting and voting right before the business continues to grow.
How to create an LLC Operating Agreement
The details of LLC operating agreements vary greatly, depending on a number of aspects. However, if your LLC's Operating Agreement exceeds the basics, you’ll want to consult with an experienced business attorney.
Once you consult with a lawyer, the process is simple. You and other members meet with the lawyer to discuss the elements you want to include in the Operating Agreement. Common elements are listed above, such as number of members, tax consideration, structure of management, member investments, and sharing of profits. However, there are several more to include depending on the structure you want to set.
An LLC Operating Agreement allows you to create a management structure that you’re comfortable with and allows you to create your own set of policies about operation. That way if questions arise in the future; you have a document that backs up your statements.
While there are forms online that allow you to create LLC Operating Agreements, it’s best to consult with a business lawyer. This ensures all the information is filled out correctly and filed properly – and that no steps are skipped.
Operating Agreements should be kept with the core records of your LLC. They’re not required to be filed, nor will they be accepted by the state of Texas. They should also be kept confidential. A business lawyer can help keep your Operating Agreement safe, secure, and confidential for if and when any questions arise in the future.
An operating agreement is a very important document that all LLCs should. You want to make sure that this document clearly states in fine detail each procedure your business has in place. A business lawyer can help make sure the operating agreement is clear and concise.
Let an experienced business attorney document and submit your operating agreement for you. Contact us today to schedule an appointment.
AUTHOR
Brandi L. Joffrion, Esq.
Brandi Joffrion is a skilled attorney with extensive experience in diverse areas including litigation, estate planning, and creating limited liability companies and corporations. She is also a professor and former offshore anti-money laundering compliance officer. Brandi can provide you with particular advice on your specific situation in the areas listed above. Brandi is licensed to practice law in Colorado.
