What is an Operating Agreement ?

What Is an Operating Agreement and Why Does Your LLC Need One?

If you’re starting a limited liability company (LLC), one of the most important legal documents you’ll need to create is an operating agreement. This document outlines the ownership structure, management procedures, and other important details of your LLC. In this blog post, we’ll explain what an operating agreement is, why it’s important, and what it should include.

An operating agreement is a legally binding document that limited liability companies (LLCs) use to state the structure of the company, how the organization is run and determines the ownership.

We may have come across the term LLC (limited liability company)which is a business structure prevalent in the USA that is essentially the same as a private limited company in the UK. Thus, the Operating Agreement governs such entities and specifies each and every details regarding the organization and its owners.

In a multi-member LLC , the operating agreement becomes a binding contract between the different members and provides details like when meetings are held, assign managers, and explain how the business can add or remove members. 

The purpose of the document is to govern the operations of the business based on the objectives of the business owners or the members.

It Helps Establish Ownership Structure and Management Procedures:

An operating agreement can help establish the ownership structure and management procedures of your LLC. This can include identifying the members of the LLC, their percentage of ownership, and their rights and responsibilities. It can also establish who will manage the LLC, how decisions will be made, and how profits and losses will be allocated.

It Provides Protection for Your Business and Members

An operating agreement can help protect your business and its members in the event of a dispute or lawsuit. By clearly outlining the rights and responsibilities of each member, it can help prevent misunderstandings and disputes down the line. It can also provide a framework for resolving disputes that do arise, which can help avoid costly litigation.

It Can Help Your LLC Maintain Its Limited Liability Status

One of the benefits of forming an LLC is that it provides limited liability protection for its members. However, this protection can be jeopardized if your LLC is found to be operating in a way that doesn’t meet certain legal requirements. By having an operating agreement that clearly outlines how your LLC will be run, you can help ensure that your business maintains its limited liability status.

It contains clauses regarding :

1. Organization
2. Management and voting
3. Capital contributions of members
4. Membership changes
5. Distributions
6. Dissolution
7. Percentage of members’ ownership
8. Voting rights and responsibilities
9. Powers and duties of members and managers
10. Distribution of profits and loses
11. Holding meetings
12. Buyout and buy-sell rules (procedures for transferring interest or in the event of a death)

Let us help you out

My Legal Pal is a team of skilled lawyers proficient in contract drafting with spectacular legal experties in thelaws applicable to the agreement. We will help you draft or review your existing contracts with unlimited revisions.