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What is an LLC Operating Agreement?

Pablo Garcia
Pablo Garcia

An LLC (Limited Liability Company) operating agreement is an agreement among the LLC members as to the scope and operation of the company. It contains the members’ understanding of their financial and managerial obligations, as well as their rights and duties as members of the company. Many states in the US require that an LLC have an operating agreement.

LLCs are a popular business structure of family and small businesses. They have the limited liability of a corporation but are treated as partnerships for tax purposes. "Limited liability" means that only the company and not its individual members can be sued. An individual member is not personally responsible for the debts of the company beyond the value of her investment in it. The LLC as an entity is not taxed.

Businesswoman talking on a mobile phone
Businesswoman talking on a mobile phone

The core document when company or legal issues arise is the LLC operating agreement. It is in essence the rulebook of the company. It works as a blueprint for resolving differences over operations, finances, and the direction of the company. In the absence of such an agreement, the company is governed by the LLC laws of the state in which it was formed.

An LLC operating agreement usually contains several articles. It begins with a preamble that acknowledges that the company will comply with the laws of the applicable state. It then provides that its terms should be consistent with the intent of the members.

The initial articles provide information about the purpose of the company, its principal place of business, and any limits on the term of its existence. They also state if and how additional members may join the company. Under what terms the LLC can be continued or dissolved are also addressed.

Other articles in an LLC operating agreement deal with the financial aspects of the company. They set forth the capital contribution for each member and the record keeping methods for contributions. The articles may specify if there are any conditions on the initial capital investment. Financial articles also determine the distribution of profits and losses among the members. They usually list the salaries of managers and members.

Managerial and member articles set out the rules for electing managers. They list the duties and powers of managers, as well as those of members. Managerial powers can include nominating someone outside the company to hold its assets. The articles also specify the liability of mangers to members for losses or damages to the company.

Articles of assignment state under what conditions a member may assign, sell, or transfer her interest in the company. They also set out the method for approving assignments. Assignment articles may also determine whether the person who buys or receives an interest in the company can become a member. An LLC operating agreement concludes with member certifications that the agreement has been adopted by them all.

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