What Is an LLC Operating Agreement?

As the saying goes, every successful business started out small. Even so, the thought of the risks attached to starting a small business and the fear of failure may be so overwhelming that you may want to quit. But quitting is not an option, right?😊 At least, not when there are business plans that are very low risk and protect the business from the liabilities of the owner. That’s why the answer to the question, “What is an LLC operating agreement?” is so crucial.

Whether you’ve owned your LLC for a while or you’re just getting started, the question, “what is an LLC operating agreement?” is one lawyer in the industry gets all the time. In this article, we seek to answer that question and explain how an LLC operating agreement can help your business go from small to booming. 

What Is an LLC?

Before taking you on a ride through the main topic, let’s briefly cover what an LLC is and what purpose it serves. We are sure you’ve heard of an LLC if you’re reading this 😊, but you may not be familiar with the whole definition.

A Limited Liability Company (LLC) is a legal business structure designed to protect its owners from bearing responsibility for the LLC’s liabilities and debts. LLCs are simple and very flexible to run, giving credibility to owners while protecting an owner’s personal assets. LLCs also provide other legal perks of corporations and partnerships.

So, who can run an LLC? With the exception of banks and insurance companies, any business entity or individual can be a member of an LLC. The formation of an LLC varies from state to state, but generally, you have to file the following information with the state:

  • A name (preferably a cool one)
  • Articles of organization that establish what’s expected of each member
  • The names and addresses of members and registered agents
  • The business’ statement of purpose

Basically, starting your company as a limited liability company enables you to create your startup with fewer complexities and much fewer compliance requirements than needed for a corporation. Coupled with the fact that your personal assets are protected from liabilities, an LLC may just be your best bet 🙂!

What Is an LLC Operating Agreement?

Now that we’ve reviewed the concept of a limited liability company and its purpose 🙂, without boring you any further, let’s delve into the main subject of discussion: What is an LLC operating agreement? This article is mainly aimed at intimating you with the meaning of an LLC operating agreement, its components and characteristics, and how it can help you when running a limited liability company.

An LLC operating agreement is pretty similar to the articles of incorporation that oversee the activities of a corporation. The sole purpose of this document is to ensure that all members of the LLC fully understand their roles and obligations and adhere to them, thereby avoiding misunderstandings and squabbling among the members. It’s an important document for setting up a limited liability company. This is because it details how the company will be run and contains sections such as organization, management, voting, distributions, capital contributions, membership changes, and dissolution.

Although most states don’t make it compulsory to have an LLC operating agreement, this doesn’t make it any less essential. If you haven’t already set up your LLC, consider creating one when setting your company up initially, as it generally stands as proof that the personal and business affairs of the members are indeed separate. If you already own an LLC, there’s no time like the present!

What Is an LLC Operating Agreement Comprised Of?

A Limited Liability Company operating agreement is a legal document that outlines a few different things:

  • The terms of ownership
  • The duties and obligations of the LLC members
  • The financial as well as functional relations among the members in a structural and detailed manner

How an LLC Operating Agreement Can Help

As stated earlier in this article, an LLC is very easy to run due to its simplicity and the protection it offers to its members. It isn’t a binding requirement to establish a limited liability company in order to do business but can be very beneficial nevertheless. Since we have discussed the meaning of an LLC operating agreement and what it should entail, let’s forge ahead 😀!

You’ve probably identified some benefits of LLC operating agreements already. Here, let’s take a look at the benefits of having an LLC operating agreement. Here are some of the benefits of having an operational agreement as a guiding document for your limited liability company:

1.   Customized Rules

An LLC operating agreement in place helps to customize the rules guiding the limited liability company. If the operational agreement is not in place, the company will be bound by the default rules of the state in which the company is established.

2. Control

An operating agreement helps you to stipulate who controls what in the business activities of the company. This helps to curb the excesses of managers and members alike without causing a conflict of interest.

3. Separate Business from Personal Interests

For the sole purpose of liability and taking responsibility for the company, an operating agreement comes in handy. Like we mentioned before, it helps to distinguish the business from its owners. This protects the business from the owners’ liabilities and vice versa.

4. Succession

The operating agreement can outline a plan for if members die or are unable to continue running the business. This ensures that the business continues even after a member pulls out or dies.

Summarily, it is safe to say an LLC operating agreement plays an important part in a limited liability company. It hands members ultimate control of their business while reducing liability to its barest minimum.

Do you want to establish your own business as an LLC? If you do, you may not sure how to come up with an effective operational agreement. Don’t worry!😊 Contact us to consult with an expert or order our lawyer-approved LLC operating template. Good luck!