Why an operating agreement is an absolute must when starting a business
If you own a limited liability company in or around Los Angeles, chances are you’re somewhat familiar with one important document: your company’s operating agreement. If you are looking to form an LLC, this is an article you must read.
An operating agreement is a type of business contract that contains provisions that govern the operation of an LLC. Think of it as the LLC equivalent to a corporation’s bylaws.
What should be included in an operating agreement?
An OA must include a detailed listing of the terms and conditions agreed to by the LLC owners, including any contingencies that may arise to protect the LLC owners.
You should describe the protocols and policies specific to both the day-to-day operations of the business and any unique circumstances. For example, the agreement should contain provisions governing what happens if a member decides to leave the LLC. You should also address what to do if a homeowner dies or divorces their spouse. The agreement must also explain the duties and responsibilities of the members for the daily operations of the business.
In California, the legal authority governing LLC formation does not require an operating agreement (although it is worth noting that Corporations Code § 17701.02(s) defines the term “operating agreement”).
Although not required by law, having one for an LLC is highly recommended as it is a document that can help protect you and your business. If you form an LLC without an official operating agreement, you will be at the mercy of the state’s default provisions regarding operating a business, which may not be what you want. For example, some states require that a company’s profits be divided equally among members. If you and your business partners have a different profit-splitting arrangement, but lack an operating agreement, you are putting yourself at serious risk if a conflict with your colleagues should occur in the future.
Provisions to include in an operating agreement
The best thing about having an OA is that you can customize it to fit your business needs. However, there are certain provisions that you should make an effort to include in your agreement, including:
• Definitions of key terms used throughout the agreement;
• Official name of the limited liability company;
• The formation date of the LLC and the general purpose for which the LLC was formed.
• The length of time the LLC plans to be in operation. In most cases, the term is “perpetual” unless a specific number of years is designated.
• The address of the principal office, the name of the Registered Agent (to whom the legal documents are sent) and the address of the Registered Agent.
• Contributions of each member and the nature of their contribution (eg, contributions in cash, real property, intellectual property).
• Responsibility of the Partners Declaration that the debts, obligations and other responsibilities belong to the company, not to the partners.
Talk to an attorney for assistance in preparing and properly filing an operating agreement
Although it is possible to prepare an LLC operating agreement yourself, you may want to take the time to speak with an experienced business contract attorney in Los Angeles. Having legal counsel will help ensure that your agreement contains the necessary provisions and does not leave out any critical issues or stipulations.