The key document that describes how a Limited Liability Company (LLC) will operate is the operating agreement. In most US states, it is a requirement. It is a legal instrument that regulates the management and operations of the LLC. An agreement between the LLC’s members called the Operating Agreement outlines how the company will be managed, how decisions will be made, and how profits and losses will be distributed.
Without an Operating Agreement, an LLC will be bound by the state’s default laws and rules at the time of its formation. This implies that the state’s LLC laws, which might not be appropriate for the company, will control the LLC. The state laws might not adequately meet the particular requirements of the LLC, which might cause disagreements among the members. If the LLC doesn’t have an Operating Agreement, it may also be subject to state dissolution rules, which could lead to the LLC’s dissolution. What Information Should Be in an Operating Agreement?
1. Ownership: The Operating Agreement should specify the LLC’s ownership structure, indicating how much each member has contributed and how much of the company they hold in total.
2. Management: The Operating Agreement should indicate whether members or a chosen manager will be in charge of running the LLC. 3. Profit and Loss: The Operating Agreement should specify how members will share in profits and losses.
5. Membership Changes: The Operating Agreement should specify how members of the LLC can be added or removed.
An LLC with a single member is known as a single member LLC. The following should be in the Operating Agreement for a Single Member LLC:
2. Management: Whether the LLC will be run by a chosen manager or by a member, that information should be included in the Operating Agreement.
4. Voting and Decision-Making: The Operating Agreement should outline the procedures for voting and decision-making, as well as the number of votes needed to make important decisions.
Do Bylaws and Operating Agreements Have the Same Purpose?
No, bylaws and an operating agreement are not the same thing. The rules and guidelines that direct a corporation’s internal activities are known as bylaws. They are legal documents that outline the corporation’s management structure, decision-making process, and method for allocating profits and losses. Corporations must have bylaws, whereas LLCs must have an operating agreement.
An Operating Agreement should generally not be backdated. Backdating an Operating Agreement may be viewed as fraudulent and result in future legal problems. It is recommended to draft a new Operating Agreement with the proper effective date if amendments to an existing Operating Agreement are required.