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How to prepare an LLC operating agreement

On Behalf of | Jun 8, 2022 | Business Law

Forming a new business involves a number of key tactical considerations. One of the best ways to form a new company is under an LLC arrangement. A limited liability company offers a number of crucial advantages, including a pass-through tax rate. To form an LLC, you will also need an operating agreement.

Your company will need an operating agreement

When you decide on an LLC as your business entity, you will need to legally form under this arrangement. Although an operating agreement is not required by law, it’s still the smart move. Having a binding set of rules and regulations in place will save you a great deal of trouble going forward.

If the formation of your company took place as a series of verbal or handshake deals, now is the time to codify them. All the rules you have agreed to should be included in your basic operating agreement.

Should you not have an operating agreement in place at the time you form your company, trouble may be in store. You may find yourself governed by the default rules of your state.

What an operating agreement should consist of

The operating agreement that you prepare should contain a number of key elements. These will be the guiding principles that your new company will operate by. The terms of the agreement should be spelled out in as clear and precise a fashion as possible. This will limit the potential for disagreements.

The first thing that your new operating agreement should include will be a full breakdown of the percentage of ownership held by each founding member. This will spell out the level of income that each member can expect to make at their position. The duties that are expected of each member should also be defined.

All of the relevant rights and responsibilities, such as voting and other forms of decision making, should also be set in stone. The buy-out rules that the members operate under should be set forth. The precise distribution of profits and losses should be clearly documented.