LLCs and Operating Agreements

The document that defines how an LLC is to be structured and operated is called an Operating Agreement. It’s a vital document, essentially forming the skeleton of your business.

In a properly-worded Operating Agreement, you can expect to see the following key points, in addition to other administrative functions:

  • Whether the LLC is member-managed, manager-managed or managed by a select group of members
  • Whether or not the LLC chooses to use traditional management titles such as President, Secretary, etc
  • How managers or managing members are appointed or removed
  • The duties and responsibilities of the members or managers
  • Restrictions on ownership and transfer of membership interests
  • How the profits and losses are to be distributed amongst the members
  • What happens in the event of the LLC’s bankruptcy
  • The circumstances under which a member may voluntarily leave the LLC
  • The circumstances under which a member may be bought out by other members, voluntarily or involuntarily
  • How disputes between managers, members or both are resolved
  • The level of control managers have over day-to-day operations of the LLC, and when management actions will require pre-approval by the members
  • How the Operating Agreement may be changed
  • How members may leave and join the LLC
  • When an LLC may ask its members for additional cash or property contributions, and what happens when members cannot or refuse to pay

Not having an Operating Agreement in place for your LLC is a bad idea. The IRS can challenge your business, and your tax deductions. If your LLC gets into trouble and becomes involved in a lawsuit, the other attorney can argue that your LLC is a shell, and shouldn’t give you any asset protection. And if you get into a fight with your partners in the LLC, not having an Operating Agreement can make it a lot harder to break up the assets equally, without a court battle. Look at your corporate records binder. If you don’t have an Operating Agreement, make sure you take care of that as soon as possible!

There are many variables when you’re structuring a business. That’s why it’s hard to go through a quick-service website. Unless you talk to someone who’s got some knowledge and experience on both the tax and the legal side, it’s hard to know what you don’t know. And that can leave you vulnerable.

Got questions? Contact us! We’re here for you.

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