What is an Operating Agreement?

When starting a limited liability company (LLC), one of the key foundational documents to put in place is an operating agreement. This crucial legal document outlines the structure, rules, and management of the LLC, ensuring clarity and consistency in how the business is run.

What is an Operating Agreement?

An operating agreement is a contract that LLC members create to outline the structure and operations of their company. It covers crucial aspects such as ownership interests, management roles, decision-making processes, profit-sharing arrangements, and dispute resolution mechanisms. This document is highly customizable and can be tailored to suit the specific needs and preferences of the LLC members.

What Does an Operating Agreement Include?

1. Membership Details:

   • Names and addresses of all members

   • Percentage of ownership interest for each member

   • Capital contributions made by each member

2. Management Structure:

   • Roles and responsibilities of managers (if applicable)

   • Decision-making processes

   • Voting rights and procedures

3. Financial Provisions:

   • Distribution of profits and losses

   • Rules for capital contributions and distributions

   • Handling of financial transactions and banking arrangements

4. Dissolution and Exit Strategies:

   1. Procedures for dissolving the LLC

   2. Buyout provisions for departing members

5. Dispute resolution mechanisms

How Does an Operating Agreement Differ from Bylaws?

While both operating agreements and bylaws govern how a business operates, they serve different purposes and apply to different types of entities. Bylaws are typically used by corporations to define the structure and rules for shareholder meetings, director appointments, and officer responsibilities. On the other hand, operating agreements are specific to LLCs and focus on ownership interests, management structures, and operational guidelines.

An operating agreement is a vital document for LLCs, outlining key aspects of the business's operations and governance. It provides a framework for decision-making, clarifies member roles and responsibilities, and helps prevent disputes and conflicts down the line. By creating a comprehensive operating agreement, LLC members can establish a solid foundation for their business and ensure its smooth operation in the long run. Howard Law has decades of experience drafting, reviewing and litigating Member issue - all starting with detailed drafts of the LLCs Operating Agreement.