LLC Operating Agreements
The Operating Agreement is the main document that set out all of the ways a limited liability company (LLC) will be run and a crucial part of any LLC. State laws have default rules for how LLCs will operate but most people will want something better than the default rules. Most state laws allow nearly unlimited leeway in changing the default LLC rules and the Operating Agreement is where this information goes.
For a solo business an Operating Agreement can be very simple, using just use a basic form. For a solo entrepreneur, the operating agreement is essentially an agreement between you and yourself. Importantly, banks will want to see this document verifying ownership.
However, with multiple members things get complicated quickly. An LLC with multiple members is a bit like a marriage – but instead of navigating much of the interaction with your spouse through loving trial and error and a lot of give and take, the duties, strategies, and rules of a business partnership can be decided early and clearly. And like some marriages – business partnerships can end in divorce. One of the most important things your Operating Agreement will cover is what happens if things go wrong, from a member wanting to leave, being forced out, or even what happens if a member dies.
The Operating Agreement will cover how ownership is structured and who will run what parts of the company. It should also deal with the differing time commitments and financial commitments of the members. In one case, the member who invests money may be paid back in the form of a loan with interest. On the other hand, the member working the business daily, may be paid reasonable compensation. There are myriad ways to structure these issues.
A good Operating Agreement will cover at least all of the following and likely quite a bit more:
Capital contributed by the members and the return of capital
Member’s compensation, time commitments and duties
Who will manage the company and limitations stating when they need approval from the others members
Intellectual property to be assigned to the company
Scope of the purpose of the company and how to avoid conflicts of interests
Who can loan money to the company and on what terms
Who gets paid from profits, when, and cash reserve requirements
When to dissolve the company and who gets what’s left
Restrictions on transfer of ownership
Right of first refusal when one member wants to sell
Mediation or other methods of conflict resolution
What happens if a member dies or becomes incapacitated
Covenants to the company like non-competition and confidentiality
When and how to declare a forfeiture of a member’s ownerships interest
Deciding on these topics and making sure you have the right terms in place will be crucial to the early and long-term success of your business. Do this before you make the “legal” commitment. Speaking with an attorney that is experienced with drafting Operating Agreements will be crucial to ensuring a properly set up LLC.
To speak to an attorney at Anthony Law about your Operating Agreement, contact us today.