The operating agreement refers to an important document for all LLCs. It outlines financial rights, duties, and obligations of the LLC's members as well as any managers that it may have. Some states require an operating agreement but not all do. Even if you form your LLC in a state where the operating agreement is not required, it is good practice to complete it.
Why Create an Operating Agreement
The most obvious reason to create an operating agreement for your LLC would be if you live in a state where one is required. In this case, creating the agreement is a legal requirement and you could face a penalty if you do not.
For those who operate in states where the agreement is not required by law, it will still serve a few key purposes. The agreement makes it obvious that your LLC takes business matters seriously and can prevent disagreements down the line. These disagreements can be between members or, in the case of single-member LLCs, between heirs. Additionally, many banks strongly encourage or even require LLCs to provide an operating agreement to open a bank account.
Operating Agreements for Single-member Limited Liability Companies
The most common situation when the owner of a limited liability company wants to avoid completing their operating agreement would be in the case of an LLC with one member. You may feel as if it is not necessary because you are the only one involved and know what you want to do.
Despite this misconception, single-member LLCs should always have operating agreements and include a provision for its transfer upon death. This is a crucial step if you want your family to inherit a portion or all of the company when you die. Thanks to this part of the operating agreement, your heirs can avoid probate and receive the LLC ownership with a simple transfer or trust. Probate should be avoided since it is time-consuming and tends to use up the LLC's funds.
Of course, you also want to create an operating agreement for the bank-related reason mentioned above. You will likely find it much more challenging to open the bank account for your LLC without one.
Operating Agreements for LLCs With Multiple Members
The reasons to create an operating agreement in the case of an LLC with multiple members are much more obvious. After all, everyone has their own interests at stake, and you want to prevent future disagreements.
For multi-member LLCs, an operating agreement can be the simplest way to declare each member's ownership percentage. This lets you ensure that the members make the contributions they agreed to. On a related note, the operating agreement can outline or restrict the methods and situations in which it is possible for a member to sell interests in the company.
The agreement will also define the powers of the manager, including actions they can take by themselves and those requiring approval from the members. Operating agreements can also help protect information of a sensitive nature. This is done by including a portion that limits disclosure to protect information, both of the company and of other members.
There are services available that can help you craft your LLC's operating agreement. Some will offer templates that are easy to customize while others will help you draft the agreement from scratch.