The Limited Liability Company Operating Agreement is important to all LLC business. Knowing what absolutely needs to be addressed in this document can avoid business disputes and potential business failures. You are making an investment of money and time in your new business. Make sure your business is built on a solid foundation. This is ensured by having a suitable arrangement for your limited liability company.
ESSENTIAL # 1: Always have a written operating agreement from the limited liability company.
If an LLC does not adopt an operating agreement, it is subject to a set of predetermined operating and governance rules established in law. It’s pretty clear that all laws assume that a limited liability company will have a written agreement with the operational details. It only provides predetermined provisions to address the situation where an LLC does not adopt one.
Don’t jeopardize the fate of your business by subjecting it and its owners to a generic set of rules. You will find that most of the default layouts will not be suitable for your business. For example, some LLC laws say that each member shares EQUAL in the profits of the limited liability company, regardless of how much each contributes in terms of money and services. Usually this is not the intention.
ESSENTIAL # 2: Each member and the LLC itself must sign the Limited Liability Company Operating Agreement
An operating agreement for a limited liability company is the primary document between the owners of the business entity. In most cases, the LLC itself is also part of this document. First of all, you should always make sure that all members and the company itself sign the Agreement.
A big mistake you make is when you go through the effort of preparing an LLC Agreement but then fail to get all the relevant people to sign it. All LLC members and officers must sign it.
ESSENTIAL # 3: Limited Liability Company Operating Agreement grants LLC Authority
When it comes to a multi-member limited liability company, a common problem that arises as an LLC business grows and evolves is that, at some point, there are too many cooks in the kitchen. In other words, too many people who have the authority to act on behalf of and bind the business entity.
At the beginning of the life of a limited liability company, the management structure must be decided. Generally, there are two options: member managed and manager managed.
A member-managed structure gives each member the authority and right to manage and conduct business on behalf of the limited liability company. While the member-managed structure is the most common and is generally appropriate for a single-member LLC, it has limitations as more members are admitted into the limited liability company.
Think early on whether it will always be the case that all the people admitted as members will be active, executive-level managers of the LLC. If not, use a manager-managed structure. This will save you a lot of time and headaches later on.
ESSENTIAL # 4: Limited Liability Company Operating Agreement Must Evidence of Property Breakdown
You’d be surprised how many times people get together and verbally agree who will own what in a company. They then established a limited liability company to run the business and never documented the relative ownership in writing.
Later, as the memories fade and the business prospers, the owners disagree with the property. This causes a lot of time and money to be spent on non-productive activities. Remember, once the disputes arise and then the litigation, everyone loses except the attorney.
Always, always, always document the specific and relative ownership of each member in the LLC Agreement and keep it updated as new members join or additional ownership units are issued to existing members.
The Limited Liability Company Operating Agreement is the most important document for an LLC business. Please take the time and effort to ensure that it is properly tailored to your situation and is signed by all relevant parties. Then, on an ongoing basis, make sure it is properly modified and updated as the LLC business evolves.
