What is an LLC Operating Agreement and Do You Need One?

Valentine’s Day is tomorrow! Yes, the day to celebrate the ones you love. For some, that’s means a significant other, perhaps a new relationship or their longtime spouse. Or, maybe it’s yourself, and you plan on diving into the box of chocolates you bought at the drugstore (hey, there’s no shame in a little self indulgence).

So, what does Valentine’s Day have to do with LLC’s? All this talk of love and relationships got us thinking: an LLC operating agreement is much like a relationship. It involves a contract between members of an LLC, and much like a relationship, romantic or otherwise, requires commitment to values and standards. In this case, these values and standards are set by a company.

Whether you’re single or taken this Valentine’s Day, having an LLC operating agreement is integral to the success of your business and its future. Let’s break down what an operating agreement is and why you need one.

What’s a LLC Operating Agreement?

An operating agreement is a business contract that lays out the operations of a limited liability company (LLC) and identifies the agreements between members of that LLC. The contract serves as a way to set out all the terms and conditions agreed by the members of the LLC, and in many ways can protect the owners from liability.

Both day-to-day operations and special circumstances are covered in an operating agreement. For example, if a member suffers an unexpected tragedy such as divorce or even death, members can reference the operating agreement to ensure how to process the situation. Each operating agreement is unique and customized to the needs of the LLC and its members.

What Should Be Included in an Operating Agreement?

Business and tax law website, The Balance, includes a comprehensive list of details found in an operating agreement. Below we will cover the fundamentals:

• Definitions. In the definitions section, major terms, abbreviations, and specific meanings are defined.

• Name of the limited liability company.

• Term (length) of the LLC. In most cases, the length is "perpetual" unless a specific number of years is designated.

• Formation date of the LLC.

• Address of principal office

• Name and Address of the Registered Agent

• Purpose for which the LLC was formed.

• LLC member(s) information, including names and addresses.

• Contributions of each member (cash, personal property, real property, intellectual property), or other.

• Liability of Members Statement that the debts, obligations, and other liabilities belong to the company, not to the members.

• Process for admitting new members

• Management. The management section outlines the management structure and what management can and cannot do.

• Fiduciary Duties for managers, officers, and members

• Meetings including dates/times of meetings and their records

• Dissolution and Termination. This section includes details on circumstances requiring dissolution of the LLC or termination of a member.

Creating the Operating Agreement

It’s highly recommended to have an attorney in your state review the agreement to ensure that it contains all necessary information. You can prepare the document yourself, but acquiring legal review and approval will eliminate any legal liability and assure that your agreement is in compliance with the state.

State law regulates operating agreements, and while each agreement will be different based on the need of the LLC, it’s crucial that your agreement complies with state regulations. This may mean details including agreement language.

So, Do You Need an Operating Agreement?

We say, yes! Valentine’s Day aside, in any relationship, whether business or personal, communication is key. Operating agreements afford you the ease of clear terms and conditions required for your LLC. Not only are you laying out the standards for yourself and the members of your LLC, but you’re identifying them in the eyes of the state (and the law). Operating agreements are a great tool to ensure the success of your company.