What is an LLC operating agreement and how does it work?

What is an LLC operating agreement and how does it work?

First of all, you should know that an LLC or Limited Liability Company is a legally recognized business entity in the state.

It establishes a legal separation between the registered company and the owner of the LLC.

If you want to learn more about this entity, you can do so in this article about what an LLC is.

Now, let’s look at what an Operating Agreement of a Limited Liability Company is.

What is the Operating Agreement of an LLC?

It is a document that sets out the respective rights, duties, benefits, and responsibilities of the members of a company.

Regardless of the type of business, an operating agreement always helps to ensure that the model is clear and that everything points toward the goals and needs of the company.

In some states in the USA, the operating agreement of an LLC is required. However, there are other states that do not require it.

The agreement should be signed by each member of the company without the need for notarization.

What is included in the Operating Agreement?

1. Business Information

The following details should be included in the Operating Agreement:

  • Company name.
  • Physical address of the company.
  • State and date of formation.
  • Information about the Registered Agent.

2. Members

The functions and responsibilities of each of the LLC’s owners (members) must be added, along with the percentage of ownership of each.

Each member holds certain chains of command in the company, as well as a percentage of profits. All of this is made clear in the Operating Agreement, which is why it is a very useful tool to protect your personal liability.

3. Management

An LLC can be managed by the same members who constitute it or by managers (called Managers).

In the case of being managed by the members, it must be determined how many members will have this responsibility of making important business decisions and carrying out day-to-day processes.

On the other hand, if the second option is taken, the Manager is responsible for the management of the company. It is important to note that the Manager can be a Member of the company, but it is not necessary.

4. Protocols and Capital Collection

The operating agreement of an LLC details the rights or powers of each member.

For example, it details who will be the member(s) responsible for adding capital or new protocols to the company.

The important thing is to detail each of the actions, rules, rights, and responsibilities of the company’s members very well to avoid confusion and complications in the future.

5. Taxes

The Operating Agreement helps establish the tax situation of a company successfully. If the LLC has a single owner, taxes will be levied on them as an individual or corporation.

If the LLC has more than one member, they will have two options:

a) Be taxed as a partnership.

b) Be taxed as a corporation.

Why Should You Create an Operating Agreement?

1. Protecting Your Liabilities

As mentioned earlier, an operating agreement details the type of business model of the company. When an operational model doesn’t sufficiently demonstrate that you’re operating as an LLC, you risk a court going after the personal assets of members in case of debts.

An operating agreement helps avoid this.

2. Managing Internal Disputes of an LLC

It’s very common for disputes to arise among partners or members in a company.

The operating agreement can include dispute resolution mechanisms that serve as a protocol to ensure their proper handling.

This way, these disputes can be resolved calmly and professionally without the company having to come to an end.

3. Making the Company More Efficient with an Operating Agreement

Just like for disputes, you can also add protocols for task execution that align with the company’s goals and objectives.

This ensures that the right strategy is being employed, making the company sustainable and scalable over time.

4. Defining Roles

Through this agreement, you can define the roles of each of the members so that they know their respective responsibilities.

Similarly, when it comes to receiving benefits or rewards, each member knows their share.

Need Help Creating Your Business in the United States?

We are Rex Legal, and we are ready to assist and advise you in your process of creating a company in the United States.
Contact us, and we will be happy to help.

Related Posts
Leave a Reply

Your email address will not be published.Required fields are marked *

ten − ten =