In a previous blog post we briefly talked about operating agreements. This topic is important enough to merit further examination. We’ll specifically look at what you need to include in an operating agreement for an LLC.
The Purpose of an Operating Agreement
Think of an operating agreement as the founding document that spells out the essentials of your business. Everything should be outlined including the management structure, membership interest, capital contributions and the financial allocations and distributions. More isn’t always better, but in this case being as detailed as possible will help you in the long run.
What to Include in an Operating Agreement
It’s important to outline your management and financial structure. This will deter any potential disagreements if the LLC has more than one member. Failure to include such information in your operating agreement could make you subject to your state’s default laws. For instance, some states have statutes that say members of an LLC must split profits and losses equally, regardless on ownership.
As mentioned above it is important to outline the capitalization of the Company. Capital Contributions are the amounts of money and values of property contributed by member(s). Also important is the distribution of profits and losses. Are members entitled to revenue generated by the LLC? If so, how much and how often are funds dispersed?
Finally, it is important to include guidelines for transfers of membership interest in the event of a death, incapacity, bankruptcy or if a member leaves or is bought out. You’ll need to include rules detailing the buyout provisions. This can help make clear terms on how much is to be paid and when.
Creating an operating agreement can be a lot of work. It’s best to consult a professional like the ones at Structure Law Group. A skilled attorney can help secure your business and provide you with peace of mind.
About Structure Law Group
Structure Law Group is a San Jose based firm that specializes in business issues including business formations, commercial contracts and litigation.