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Overview on Operating Agreement Preparation

By Edited Feb 10, 2014 0 1

An operating agreement is an agreement in a Limited Liability Company (LLC) where the members governing the business and members' financial and managerial and duties are contained.

Although there is state requirement that LLCs have an operating agreement, it would be very important though in governing the business outflow. Primarily, it will be used to take priority over default rules imposed by a state's LLC Act.

Since there are states that have default rules which require owners to divide LLC profits and losses equally, it would be unfair if others did not invest equal amounts. Profits will not be allocated equally.

Thus, an operating agreement will be helpful in protecting the investments of partners in case disputes or problems regarding profits or losses arise.

An operating agreement has the same function like corporate by-laws and partnership agreements, in multi-member LLCs. For sole member, it will serve as declaration of the structure that the member has chosen for the company.

Also, it can be used to prove in court that the LLC structure is different from an individual owner and the owner may otherwise prove that he or she is separated from the entity itself, since this is a lawfully recognized document.

Operating agreement also guards the status of limited liability and ensures that the owner's status will be respected in courts.

Typically, operating agreement addresses the members' percentage of interests in the LCC, their rights and responsibilities, members' voting powers, and the buyout or buy-sell provisions. It also explains how profits will be allocated, how the LLC will be managed, what are the rules when holding meetings and taking votes and what will happen should a member wants to sell his/her interest, dies, or becomes disabled.

Establishing LCC through Operating Agreement
It is of great importance that the operating agreement is well-suited to the business since this will establish the proper structuring of the financial and operational relationships among co-owners.
In crafting the operating agreement, determining and establishing the percentage in the company's ownership should be a prime consideration. This concerns not only the shares in capitals and stocks but the matter of ownership as well.

Aside from including the ownership percentage, the operating agreement should also cite the owners' responsibilities and rights and it should as well work on how they will share profits and losses or when a co-owner decided to leave the business.

Through the operating agreement there will be limitations and liabilities on certain business matters such as management, finances and state law compliance.

To avoid unequal allocation of profits in case dispute arises, the operating agreement should spell out how co-owners will split profits and losses. Through the agreement, they can choose the rules that will govern LLC private workings rather than following default rules that may not be good for the company.

The following are additional points to remember in operating agreement preparation:
· It should define how the LLC will be managed, whether it is manager-managed or member-managed, as well as the manager's rights and tasks.
· It should address the set up of member's service and capital contributions.
· It should determine the voting rights of the members regarding certain matters and issues that may crop up.
· It should determine buyout provisions.
· It should determine distributions.
· It must have a planning of tax payments.
· It must also determine the conditions for dissolution and dissociation.



Jun 23, 2010 3:55pm
Very good information. Well explained. Thanks!
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