Your LLC Operating Agreement

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r without one. Additionally, because state laws govern LLCs, an operating agreement ensures your own rules run your LLC instead of, by default, the state?s. However, the most important reason to have an operating agreement is to protect your LLC?s liability status.

Since the most common reason a Limited Liability Company is formed is to limit personal liability to the assets of the LLC, it would not make sense to allow the possibility of your LLC loosing this very protection. By having an operating agreement, your LLC will be more likely to garner the respect of the courts. This is probably most important with single member LLC?s. Often courts will look to see if there is separation between your business and personal operations. They will ask, ?Is this business run any differently than a sole proprietorship?? The formality of an operating agreement lends that much more credibility to the separate existence of your LLC.

Unlike corporations, which are governed by both state and national (Model Business Corporate Act) laws, LLC?s are governed by state laws. Each state provides a basic set of rules for the operation of your LLC. Without an operating agreement, which would set up your own rules of government, the state?s laws would rule by default. For example, if you sell two partners a small percentage of your solely owned LLC. Without an operating agreement (which would spell out your ownership and profit sharing preferences), your new partners could own 66.67% of your LLC and it?s profits based on the state?s default rules.

Even without the threat of state-imposed rules, you should use an operating agreement to set up the management and financial structure of your LLC. Again, a corporation automatically has management structure with Officers running day-to-day operations and representing the directors and the directors representing the shareholders. First, you?ll need to decide whether or not you will be manager managed or member managed. Most states default with your being member managed. That is, all members have a role in the LLC?s management and have authority to act on behalf of the LLC. If you wanted to limit authority to specific managers, then you might want to be manager managed. This is often specified in your articles, but is should be spelled out in detail in your operating agreement. Additionally, you?ll want to describe, in the same detail, the ownership & financial structure of the LLC.

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