LLC Operating Agreement
An operating agreement for an LLC is an agreement among its members about the business of the LLC, the rights and duties of the members, and any special arrangements that are agreed to before hand. Operating agreement are not a strict requirement of any state, but they are considered a "best practices" procedure and are highly encouraged.
The operating agreement can be compared or likened to the by-laws of a corporation or the partnership agreement in a simple partnership--it outlines the rules, regulations, and business practice of the LLC and it's members, and can be used to override the default rules imposed upon an LLC by a state's LLC act. An example of this type of override is when a particular member contributes a significant percentage of the operating capital to the LLC and the other members agree that this member should have increased voting power--this can be proportionate to the amount invested, or any number that the membership agrees upon, but it would be formalized as part of the operating agreement.
If the LLC is formed as a single-member LLC, the operating agreement is a declaration as to the structure and organization that the member has chosen for his company, and is an important key in determining how the IRS will treat the LLC for tax purposes.
Other key issues that should be addressed in the operating agreement are as follows:
- Capital or asset contributions by the members
- Taxation planning
- Accounting model (i.e. accrual, cash or modified cash basis)
- Record and minutes keeping
- Frequency of member meetings
- Management structure
- Officer appointments
- Buy-out provisions
- Management rights, duties, and obligations
- Date of LLC dissolution (some states require dissolution date)
- Any special resolutions, voting rights, or operational duties and requirements
These are but a sample of the types of provisions, resolutions, and issues that should be addressed in the operating agreement, and it is a best practices procedure to include any significant LLC operational duties and responsibilities in the operating agreement.
