There are a lot of things that are important and beneficial to your business. From the outside, a good brand, proper management, and financial backing are some of the aspects many young business owners consider while forming their business.
Although this may be true in many instances, there are other considerations and key factors that many new business owners overlook or do not spend enough attention on while setting up their business. One simple thing during the formation process which you’ll come across is having an operating agreement, it may sound somewhat complex to have, but if you’re a Limited Liability Company or LLC business owners, having an operating agreement would clear out any unforeseen issues before it even happens.
Important things to remember about an operating agreement
What is an LLC operating agreement?
Having an LLC operating agreement will clearly outline the membership duties and also ownership of the LLC. This is a legal document that will in many instances contain six important articles –
Article 1 – Organization
This will summarize who is part of the business, ownership of the business and different duties, and also when the business was formed.
Article 2 – Management and Voting
In this section, members of your LLC will be named and addressed to as management. This will outline who is part of your business management team, and how they can go to make any changes in the business through a voting system. It might seem formal, but this is something a lot of new LLCs overlook during formation.
Article 3 – Capital Contributions
Who has contributed and the amount thereof to the forming of the business and how will additional funds be accumulated for the LLC members.
Article 4 – Distributions
How profits and losses will be shared and divided among members.
Article 5 – Membership changes
In the event of any changes occurring in your management team, this section will explain how it is to be done, and how membership roles are to be transferred to existing or new members.
Article 6 – Dissolution
The final section will cover how the procedure of the dissolution of the business will work and what each member will need to do to ensure dissolution is successful and professional.
Why should I have an operating agreement?
In the beginning stages of your business, especially if you’re considering starting an LLC with various members and management, having an operating agreement will clearly outline the business-related specification of all involved members.
It will also establish guidelines for financial and working relations among members and the business. Finally, it also acts as a framework of how decisions and changes are brought about in the business, making it easier to undergo any additional changes if needed.
How do I create an LLC operating agreement?
You can make use of an LLC operating agreement template, these templates are free and easy to use, and will offer you the feature of customizing the document as needed.
How do I know if I need an LLC operating agreement?
Some U.S. states don’t require you to have an operating agreement, but in California, Delaware, Maine, Missouri, Nebraska, and New York, LLC business owners are legally required to create an operating agreement.
If you own or want to form a multi-member LLC, then you would need to have an operating agreement. This document will ensure that if any misunderstandings or any other business factors come to play, it can easily be resolved.
Also, single owned businesses or sole proprietorships are also advised to set up an operating agreement. This will bring more credibility to your LLC, and in the event of any legal actions, the court will uphold the limited liability status of your business.
Is it difficult to create an LLC operating agreement?
As already mentioned, there are a number of articles and important information that would be required in your operating agreement. Making use of an LLC operating agreement template will ensure that all the necessary information is apprehended. More so, creating a new operating agreement would mean that you comply with both state and local regulations and jurisdiction if any.
What happens after you have completed your LLC operating agreement?
Once you’ve completed your agreement, you need to review if your state or the state in which you will be conducting business requires you to file or submit a notice of the formation of your LLC. In many instances, some states would not require you to do so, but additionally, you will need to keep your operating agreement on hand.
More so, ensure that you file your operating agreement with any other important formation documentation and that every member who is part of your LLC has a printed copy for their personal records. An operating agreement helps you form your business, and is a legally bound document that can act as a guideline for members of the LLC.