One of the most important binding documents that makes up a Limited Liability Company (LLC) is an operating agreement. It will outline the rules by which the LLC will operate as the financial and working relationship between each member is defined.
If you’re a sole owner, then creating an operating agreement brings immediate credibility to the LLC. Plus, it will help to gain a favorable court ruling on limited liability status for your business.
Here are some areas that need to be included in an LLC operating agreement:
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Ownership
The first section of the operating agreement will include a detailed explanation on how the business was created, and the percentage of each member’s LLC ownership, which is based upon the amount of their initial investment. The only way an LLC ownership isn’t divided in this matter is when the business is created based on a lone person’s original idea, but they didn’t have the resources to begin operations.
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Rights and Responsibilities of Each LLC Member
Usually, LLC members will meet and elect a person to handle the day-to-day operations of the business. The LLC operating agreement should have a certificate of information that specifies the rights and responsibilities of each LLC member.
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Distribution of Profits and Losses
All profits and losses that pass through the company are the direct responsibility of each LLC member. Again, the dollar amount associated with each LLC member is based upon their percentage of ownership.
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Changes in Ownership
Most LLCs have multiple members, so its very important to have a plan in place if there’s a change in ownership. If not, most states will dissolve the LLC because of default because there was no written resolution in place if the remaining LLC members wanted to continue with the business.
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Dissolving The LLC
There will come a time when all LLC members will want to dissolve the group. The operating agreement should have some form of clarification on how the LLC assets will be divided after the business’ debts are paid in full.
Drafting an operating agreement is well worth the time and effort before starting your business adventure. It’s smart to discuss your thoughts and ideas with our Coachella Valley corporate law firm, which could assist with drawing up the agreement.
EXPERIENCED CORPORATE LAW ATTORNEYS OF SBEMP
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DISCLAIMER: This blog post does not constitute legal advice, and no attorney-client relationship is formed by reading it. This blog post may be considered ATTORNEY ADVERTISING in some states. Prior results do not guarantee a similar outcome. Additional facts or future developments may affect subjects contained within this blog post. Before acting or relying upon any information within this newsletter, seek the advice of an attorney.
