The 2 Key Purposes of the LLC Operating Agreement

LLC business owners understand the importance of forming an LLC in order to receive limited liability protection and get the tax and other benefits of an LLC. However, many of these owners form their LLC and then forget about the LLC Operating Agreement. Formation under state law is only the first step in completing the LLC organization. Do not forget to put an LLC Operating Agreement in place for your LLC.

Purpose #1: The LLC Operating Agreement Establishes Ownership of the LLC

Did you know that when a limited liability company (commonly known as an LLC) is formed under a state’s law, the LLC does not have any members (owners) unless the members are specifically listed in the Articles of Organization?

Because most state LLC laws do not require that the members of the LLC be stated in the Articles of Organization, 98% of new LLCs do not have members right after formation.

The most common way to issue ownership interests in an LLC is through the LLC Operating Agreement. So, the most important purpose of an LLC Operating Agreement is to establish the owners of the LLC and determine what rights and obligation the Members of your LLC have to each other and to the LLC.

You and your LLC’s other members should not rely on oral agreements as to who owns how much in the LLC and who has what percentage of votes. You do not want to find yourself in a situation where your LLC is making a lot of money and one of your members then claims he/she owns more of your business!

Purpose #2: The LLC Operating Agreement Establishes a Management Structure of the LLC

One of the benefits of an LLC is that the LLC laws allow Members to decide amongst themselves how they want to run and operate their LLC business.

The LLC Operating Agreement establishes the management structure for an LLC. The Members can decide for themselves whether the Members will have authority to make LLC decisions or whether the LLC will appoint managers to make business decisions.

Now, the LLC laws of each state do provide “default” provisions for management of an LLC in the event you do not have an LLC Operating Agreement. But, you do not want to rely on what your state law says about who controls your LLC. Many of these default laws end up being drastically unfair to the Members of the LLC and definitely not what was intended by the Members.

Conclusion

The LLC Operating Agreement evidences the two most important aspects of an LLC: the ownership structure and the management structure. These two aspects are so important to any LLC and without an LLC Operating Agreement setting forth the details of ownership and management, your LLC is at a high risk of disputes, disagreements, and a lot of other potential issues arising from having an incomplete LLC organizational structure.

Amyli McDaniel is a business lawyer with over 10 years experience representing small businesses. She has particular expertise in the LLC or limited liability company – a popular legal entity for small businesses. Amyli is the author of the popular eBook “The Six Step LLC Formula for Limited Liability Protection” and founder of http://www.TheLLCExpert.com a website with valuable information for the LLC business owner. info@TheLLCExpert.com

Copyright (c) 2007 Amyli McDaniel

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