What Is An LLC Operating Agreement?

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While the structure and content of LLC operating agreements varies, here are some of the types of information they most often include:

Basic Information About the Business

An operating agreement further solidifies some of an LLC’s most basic decisions and premises, many of which may already be laid out in the company’s “articles of organization,” another document important to forming an LLC. These typically include the LLC’s official name, its principal place of business, its duration, its management structure, its statement of purpose and the identification of its registered agent.

Tax Treatment Preference

LLCs typically enjoy a “single layer of taxation.” They are by default exempt from a business tax, meaning profits are only taxed at the individual level, or “layer,” when members report their share of income and expenses on their personal tax returns.

LLCs can also be a bit of a chameleon when it comes to tax treatment; depending on the type of business, LLCs may value certain incentives to elect corporate status, which they can do by selecting to file as either a C-corp or an S-corp. An operating agreement can state the LLC’s initial tax status and outline the procedure for changing the tax classification in the future.

Member Information

One of an operating agreement’s most critical functions is to specify how the business’s profits and responsibilities are distributed among members. The agreement often lays out basic member information such as names, addresses and roles within the business and includes the amount and nature of a member’s contributions (often financial, but not always) to the LLC. Expectations about compensation, which are often based on this shared assessment of member contributions, may be described along with ownership percentages.

Management Structure

An LLC will have one of two management structures. A “member-managed LLC” allows members to be “agents” acting on behalf of the company and relies on members for day-to-day management. This is desirable for small or streamlined LLCs with relatively few members and is the more popular of the two designations.

With a “manager-managed LLC,” members instead elect a smaller number of people to manage the company (while they maintain passive ownership and voting rights on major decisions). The choice in structure usually comes down to the size of an LLC’s membership and how open it wants to be to investment from outside of management. Whatever the choice, an indication of management structure is an important part of an operating agreement.

Operating Procedures

Business procedures important to running an LLC include voting, holding member meetings, approving manager actions, adding new members, facilitating member exits and even dissolving the LLC with wind-down procedures if the situation demands. These types of procedures—along with many more that might be relevant only to specific kinds of businesses—can be addressed in a variety of ways.

A Liability Statement

One of the main benefits of choosing an LLC as a business structure is the distinction that it makes between the company and its individual members. While corporate stockholders are personally shielded from their business’s liability, sole proprietors or members of a partnership are not legally distinct entities from their business and assume full personal responsibility for the risks of operation. LLCs combine the best characteristics of both structures, enjoying a corporation’s limited liability without shouldering its level of tax and regulatory burdens. LLCs need to properly define limited liability status with a clear liability statement in case this status is ever challenged. An operating agreement is one traditional place to declare this.

Additional Provisions

Operating agreements aim to proactively address bumps in the road ahead. As such, they often include provisions that describe what happens in the event of unplanned events such as a member’s death, a member’s withdrawal from the business, disputes between or among members, a need to edit the operating agreement and further issues particular to the business’s industry. Many agreements close out with a “severability provision” stating the rest of the operating agreement remains in effect if one part proves contrary to state or federal law or otherwise unenforceable.

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