1.What is an LLC Operating Agreement?
An LLC Operating Agreement is the primary contract between and among the Members of an LLC. The LLC Operating Agreement governs the membership, management, operation and distribution of any income of the company. It is similar to a corporation’s Bylaws. An Operating Agreement should be in place directly after the LLC becomes active. |
2.Why does my LLC need an LLC Operating Agreement?While not all state LLC laws require a specific written LLC operating agreement, every LLC needs written agreements evidencing the ownership of the LLC and a set of governance rules that will apply to the LLC. The LLC laws in your particular state may provide certain default rules and procedures, but the smart LLC owner will not want to rely on the LLC laws as they change from time to time and the default rules in the state laws may not be in the best interest of your particular LLC. One of the benefits of LLCs is the ability and flexibility for the LLC Members to determine how to manage and run their business. It is a common and standard LLC protocol to have an LLC to have a written LLC Operating Agreement and so by having one you are maintaining a key formality followed by most legitimate LLC business. As a result, you create one additional guard against the risk that a court will view you as disregarding your entity and find you personally liable for business lawsuits. Another significant practical benefit of having an LLC Operating Agreement is it provides a written guide for your LLC which in turn manages the expectations of the members and managers and significantly reduces the likelihood of dispute later as to what applies and does not apply to your LLC. |
3.I have a single member LLC. Do I still need an LLC Operating Agreement?A common mistake that a single member of an LLC makes is thinking that an LLC Operating Agreement is not required for a single member LLC. On the contrary, many state statutes specifically require that a signed writing is necessary to describe the affairs of the LLC and the conduct of the LLC business. In addition, single member LLCs are more susceptible to being challenged in court. If you are a single member LLC and your LLC were ever sued, the attorney for the other side may sue you personally and ask the court to hold you personally liable. This is what is known as piercing the LLC veil. If that attorney prevails in piercing through the layer of LLC protection, you and your personal money, home and other assets will all be at risk. It is even more important for a single member LLC to adopt typical LLC processes and procedures and to follow those procedures with adequate documentation. The first step to doing this is for the LLC to adopt an LLC Operating Agreement and follow the provisions set forth in that LLC Operating Agreement. |
4.Who should sign the LLC Operating Agreement?All initial Members of the LLC should sign the LLC Operating Agreement. In addition, if a new Member is subsequently admitted to the LLC, the new Member should sign a written agreement (commonly known as an Addendum) agreeing to be bound by all the terms of the LLC Operating Agreement. |
5.What is the difference between a member managed and a manager managed governance structure?A limited liability company (LLC) can be either “member managed” or “manager managed.” The initial LLC members (owners) can decide whether they, as LLC members, want to each be responsible for managing the LLC or whether they want to set up a Board of Managers (manager managed) and elect persons to be managers similar to the way a corporation is managed by its Board of Directors. Members can be elected as Managers. This structure is usually decided upon and documented in the LLC Operating Agreement. |
6.How is ownership established in a limited liability company (LLC)?Ownership in an LLC is usually structured in two ways: (1) by percentage interests or (2) by LLC membership units, which are similar to shares of stock in a corporation. In either case, ownership generally confers the right to vote and the right to share in the profits of the LLC. Although LLC membership units are like shares in a corporation, an LLC is different from a corporation in that an LLC can distribute its ownership interests as it pleases, without regard to how much money or property a Member contributes to the LLC. For example, if Dave contributes $10,000 of cash to an LLC but does not manage the business, and his partner John contributes only $1,000 but runs the LLC on a daily basis, Dave and John could decide to each have 50% of the membership units of the LLC. A limited liability company can also be organized with different classes of ownership interests, which provides flexibility for special allocations of profits and voting power. If you are thinking about having a complex structure like this, it is advisable that you consult an attorney and accountant. |
7.Is a limited liability company (LLC) required to have officers?The LLC laws in most states do not require that an LLC have specific officers. However, the business world itself will require an LLC to have officers in most cases. For example, a bank will not allow an LLC to open a bank account unless the LLC has a duly appointed officer authorized to open the account and sign checks. It is recommended that at a minimum an LLC have a President, Secretary and Treasurer. One person can serve in multiple officer roles. |
8.Is the LLC Operating Agreement required to be filed with the State?No. The LLC Operating Agreement is a private written document between the LLC and the members of the LLC. It is never required to be filed with the State. It is recommended that an LLC adopt an LLC Operating Agreement immediately after formation. |
9.Can an LLC have an oral operating agreement?In most states (but not all so check with your specific state), an orally agreed operating agreement is valid but the biggest problem with oral agreements is proving "what was agreed upon." In the event there were ever an issue, it will be very expensive and difficult to prove what was agreed upon as the terms of the oral agreement since there is nothing in writing to evidence the agreement among the members. It is not recommended to ever have or depend on oral agreements between members. By having a proper written operating agreement and requiring that an LLC's operating agreement be in writing, you reduce a lot of risk to your LLC business. |
