The Limited Liability Company Operating Agreement is important for every LLC business. Knowing what absolutely must be addressed in this document can avoid business disputes and possible business failure. You are making an investment of money and time in your new business. Make sure your business is based on a solid foundation. This is assured by having a proper agreement for your limited liability company.
ESSENTIAL #1: Always Have a Written Limited Liability Company Operating Agreement.
If an LLC fails to adopt an operating agreement, it is subjecting itself to a set of default operational and governance rules set forth in the laws. It is quite clear that every body of law assumes a limited liability company will have a written agreement with operating details. It only provides default provisions to address the situation where an LLC fails to adopt one.
Don’t place the fate of your business at risk by subjecting it and its owners to a generic set of rules. You will find that most default provisions will not be suitable to your business. For example, some LLC laws say that each member shares EQUALLY in the profits of the limited liability company regardless of how much each contributes in terms of money and services. This is usually not the intention.
ESSENTIAL #2: Every 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 and among the owners of the business entity. In most cases, the LLC itself is also a party to this document. First, you must always be sure that every Member and the company itself signs the Agreement.
A big mistake made is when one goes through the effort preparing an LLC Agreement but then fail to have every relevant person sign it. Every member and an officer of the LLC must sign it.
ESSENTIAL #3: The Limited Liability Company Operating Agreement Grants LLC Authority
When it comes to a multi-member limited liability company, one common issue that arises as an LLC business grows and evolves is that at some point there becomes too many cooks in the kitchen. In other words too many people who have authority to act on behalf of and bind the business entity.
At the very 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 every 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 does have limitations as more members are admitted to the limited liability company.
Think early whether it is always going to be the case that every person admitted as a member will be active and executive level managers of the LLC. If not, use a manager managed structure. This will save you a lot of time and headaches later.
ESSENTIAL #4: The Limited Liability Company Operating Agreement Must Evidence the Breakdown of Ownership
You would be surprised how many times people get together and orally agree on who will own what in a business venture. They then set up a limited liability company to run the venture and they never document, in writing, the relative ownership.
Later, as memories fade and the business gets prosperous, the owners disagree on the ownership. This causes a lot of time and money spent on nonproductive activity. Remember, once disputes and then litigation ensue, everyone loses except the lawyer.
Always, always, always document the specific and relative ownership of each Member in the LLC Agreement and keep this up to date as new members come in or additional ownership units are issued to existing members.
The Limited Liability Company Operating Agreement is the most important document for an LLC business. Take the time and effort to make sure it is properly customized for your situation and signed by all proper parties. Then, on a continuing basis, make sure it is properly amended and updated as the LLC business evolves.