What is Operating Agreement?
The Short Answer
Operating Agreement explained simply
An Operating Agreement is a legal document that outlines the ownership and operating procedures of a Limited Liability Company (LLC). It’s like a partnership agreement for an LLC. This document defines the rights and responsibilities of each member, how profits and losses are distributed, and what happens if a member leaves or the business is sold. It also covers decision-making processes and management structure. While not always legally required, it’s highly recommended to have one to avoid future disputes and ensure the business runs smoothly.
Real-World Example
The Tech Startup LLC
Imagine a tech startup, "Innovate Solutions LLC," founded by three partners. Their Operating Agreement specifies that Partner A contributed 50% of the initial capital and gets 50% of the profits. Partner B and C each contributed 25% and receive 25% of the profits. The agreement also states that major decisions, like selling the company or taking on new debt, require a unanimous vote from all partners. If a partner wants to leave, the agreement outlines a buy-sell clause, detailing how their ownership stake will be valued and purchased by the remaining partners.
Why this matters
An Operating Agreement is crucial because it provides clarity and protection for all LLC members. Without one, your business would be subject to default state laws, which might not align with your specific needs or intentions. It helps prevent disagreements by setting clear rules for how the business operates, how decisions are made, and how conflicts are resolved. This document is especially important when selling your business, as buyers will want to see a well-structured agreement that defines ownership and operational procedures.
Always have an Operating Agreement for your LLC. It protects your interests and clarifies how your business runs. Don’t rely on handshake deals.
Always have an Operating Agreement for your LLC. It protects your interests and clarifies how your business runs. Don’t rely on handshake deals.
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