How to Make an LLC Operating Agreement and Why You Need One

If you just established your LLC, you may be excited and ready to celebrate. But before you get too far into a spicy celebration, there are several things you need to do. One of the first things you need to finish is to create an operating agreement.

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What is an LLC operating agreement?

The operating agreement establishes how you will run your LLC. The legal document contains items like your decision-making process, distribution of money, and also how you plan to handle disputes. All your members sign the operating agreement. Their signature declares they will follow the agreement closely. An LLC operating agreement is not a required form. It does not need to be filed with the Secretary of State like your articles of organization. An operating agreement is optional but a critical component for LLCs with at least two members.

Benefits of Creating an LLC Operating Agreement

Operating agreements govern the relationship between all the members of an LLC. This is why you want one if you have at least two members in your LLC. You don’t need to create an operating agreement if you operate a single-member LLC. However, it’s not a bad idea to create one, even if it’s just you. It still provides you with an outline for the way you want to conduct business.

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How Operating Agreements Help an LLC

1. LLC Operating Agreement helps protect your limited liability status

Once you obtain an LLC, your personal assets are protected. You don’t want to lose that protection. If your LLC isn’t legitimately separated from you personally, it’s possible to lose that protection. A written operating agreement gives credibility to your LLC. It serves to prove your LLC acts as a separate entity and is not avoided for the purpose of avoiding liability. Written operating agreements hold even more important for the single-member LLC because it looks like a sole proprietorship. If you were to end up in a legal dispute, the operating agreement could make a huge difference.

2. Operating Agreements may Help with Business Loans

When you run a business of any kind, you may need loans to help cover expenses. Lenders and other businesses you may work with might ask to see your LLC operating agreement. Lenders may not lend to an LLC if there is no copy of an operating agreement.

3. It can Override Default State Rules Regarding LLCs

If your LLC doesn’t have an operating agreement, your LLC becomes governed by the laws in your state. You will have no choice on default provisions without an operating agreement. Of course, there are some provisions that an operating agreement will not override.

4. Provides a Plan for Succession

Operating agreements also serve as a business succession plan. Include the name of a person who should manage your LLC if you were to become incapacitated or die. If a tragedy occurs, it’ll make it easier for your family to either keep the business going or shut it down in your absence.

Creating an Operating Agreement

You may be a bit worried about yet one more piece of paperwork to complete. Just relax. It’s easy to create an LLC operating agreement. Of course, you have the option of hiring a lawyer to draft the agreement for you. That may be a good idea, but it can also be quite expensive. If you choose to lay out the cash for an attorney-made operating agreement, make sure they are familiar with the LLC laws in your state. This enables them to create an LLC operating agreement that can provide alternatives to default provisions. If you want to make sure it is catered to your specific needs, you might want to draft it yourself.

What Does an LLC Operating Agreement Include?

Since you understand the benefits of creating an LLC operating agreement, you may be wondering exactly what one needs to include. First off, you can write yours any way you want to. There are no legal requirements to satisfy what must be part of the document.

Tailor the document so it fits the specific needs of your business. If you are a single-member LLC, your operating agreement will be much shorter and simpler than one drafted for a multi-member LLC. If it’s just you – then you don’t have to worry about covering things like the rights and responsibilities of members. However, even though you are free to write it as you see fit, a solid document should contain a few elements minimally, such as:

Terms of Ownership

If it’s just you, make it clear that you are the sole owner and the one with all the voting rights. Also, emphasize the fact that you are not personally liable for the debts and liabilities of your LLC.

Specify Management

Establish how the LLC will be managed. If you are a single-member LLC, as the owner of the business, you’ll also manage it. Here is where you want to add who will take your place if you should become incapacitated or pass away. Remember that an LLC can be managed by a non-member, but it’s really rare for a single-member LLC. If you name a manager, make sure to include how the manager will be appointed as well as their rights and responsibilities.

Contributions & Distributions

You further prove the legitimacy of your LLC by specifying the property, money, and services you will contribute to its success. Make it clear how your LLC will distribute profits or losses. If you get both as a single-member LLC, you’ll report both of these on your personal tax return. If you would rather be able to draw on the profits of your LLC at any time, just state that in the operating agreement.

New Members

Even though you may initially be the sole member of your LLC, you may want to let others join later. Dedicate one portion of the operating agreement to how you will admit new members.

General Provisions

State all the general rules you plan to use for managing your LLC. Think about things like holding meetings, documenting decisions, voting, and things like that.

Make sure you sign the operating agreement so it’s legally binding. Remember, it doesn’t have to be filed, but it should be stored in a safe place with your other LLC paperwork and records.

These are the basics you should be familiar with when it comes to your LLC operating agreement. It is optional, but it can be a great document to have in place. It adds protection and guidance when it comes to successfully running your LLC.