Chauncey grew up on a farm in rural northern California. At 18 he ran away and saw the world with a backpack and a credit card, discovering that the true value of any point or mile is the experience it facilitates. He remains most at home on a tracto.
Chauncey Crail ContributorChauncey grew up on a farm in rural northern California. At 18 he ran away and saw the world with a backpack and a credit card, discovering that the true value of any point or mile is the experience it facilitates. He remains most at home on a tracto.
Written By Chauncey Crail ContributorChauncey grew up on a farm in rural northern California. At 18 he ran away and saw the world with a backpack and a credit card, discovering that the true value of any point or mile is the experience it facilitates. He remains most at home on a tracto.
Chauncey Crail ContributorChauncey grew up on a farm in rural northern California. At 18 he ran away and saw the world with a backpack and a credit card, discovering that the true value of any point or mile is the experience it facilitates. He remains most at home on a tracto.
Contributor Kelly Main Staff ReviewerKelly Main is a Marketing Editor and Writer specializing in digital marketing, online advertising and web design and development. Before joining the team, she was a Content Producer at Fit Small Business where she served as an editor and strategist c.
Kelly Main Staff ReviewerKelly Main is a Marketing Editor and Writer specializing in digital marketing, online advertising and web design and development. Before joining the team, she was a Content Producer at Fit Small Business where she served as an editor and strategist c.
Written By Kelly Main Staff ReviewerKelly Main is a Marketing Editor and Writer specializing in digital marketing, online advertising and web design and development. Before joining the team, she was a Content Producer at Fit Small Business where she served as an editor and strategist c.
Kelly Main Staff ReviewerKelly Main is a Marketing Editor and Writer specializing in digital marketing, online advertising and web design and development. Before joining the team, she was a Content Producer at Fit Small Business where she served as an editor and strategist c.
Staff Reviewer Jane Haskins, J.D. contributorJane Haskins practiced law for 20 years, representing small businesses in startup, dissolution, business transactions and litigation. She has written hundreds of articles on legal, intellectual property and tax issues affecting small businesses.
Jane Haskins, J.D. contributorJane Haskins practiced law for 20 years, representing small businesses in startup, dissolution, business transactions and litigation. She has written hundreds of articles on legal, intellectual property and tax issues affecting small businesses.
Jane Haskins, J.D. contributorJane Haskins practiced law for 20 years, representing small businesses in startup, dissolution, business transactions and litigation. She has written hundreds of articles on legal, intellectual property and tax issues affecting small businesses.
Jane Haskins, J.D. contributorJane Haskins practiced law for 20 years, representing small businesses in startup, dissolution, business transactions and litigation. She has written hundreds of articles on legal, intellectual property and tax issues affecting small businesses.
Updated: Jul 26, 2024, 7:27pm
Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors' opinions or evaluations.
Getty
The perennial advice to “put it in writing” rings perhaps most true in the overlapping worlds of business and law. When starting a limited liability company (LLC), an LLC operating agreement lays the foundational elements and operational guidelines of the company. Read on to learn why documenting this agreement can be so important, what these operating agreements usually include and how to create one for your business.
An LLC is the most popular structure for small businesses in the United States. The designation was created largely to increase small business access to the protection from liability afforded to corporate shareholders.
An LLC operating agreement identifies the company, states its ownership, defines member duties and lays out other structural features of the business. It usually includes basic information about the LLC and its owners (known as members), the company’s elected tax treatment and guidelines for how certain key procedures will be handled. Operating agreements function as a legal contract between or among members of a multimember LLC, though even single-member LLCs can benefit from one, too.
Most LLCs won’t need to file or provide proof of an operating agreement—in fact, a business can keep these documents confidential among members if preferred. The agreement can be updated as necessary as a source of guidelines both for normal operations and for helping resolve any disputes that may arise.
While the structure and content of LLC operating agreements varies, here are some of the types of information they most often include:
An operating agreement further solidifies some of an LLC’s most basic decisions and premises, many of which may already be laid out in the company’s “articles of organization,” another document important to forming an LLC. These typically include the LLC’s official name, its principal place of business, its duration, its management structure, its statement of purpose and the identification of its registered agent.
LLCs typically enjoy a “single layer of taxation.” They are by default exempt from a business tax, meaning profits are only taxed at the individual level, or “layer,” when members report their share of income and expenses on their personal tax returns.
LLCs can also be a bit of a chameleon when it comes to tax treatment; depending on the type of business, LLCs may value certain incentives to elect corporate status, which they can do by selecting to file as either a C-corp or an S-corp. An operating agreement can state the LLC’s initial tax status and outline the procedure for changing the tax classification in the future.
One of an operating agreement’s most critical functions is to specify how the business’s profits and responsibilities are distributed among members. The agreement often lays out basic member information such as names, addresses and roles within the business and includes the amount and nature of a member’s contributions (often financial, but not always) to the LLC. Expectations about compensation, which are often based on this shared assessment of member contributions, may be described along with ownership percentages.
An LLC will have one of two management structures. A “member-managed LLC” allows members to be “agents” acting on behalf of the company and relies on members for day-to-day management. This is desirable for small or streamlined LLCs with relatively few members and is the more popular of the two designations.
With a “manager-managed LLC,” members instead elect a smaller number of people to manage the company (while they maintain passive ownership and voting rights on major decisions). The choice in structure usually comes down to the size of an LLC’s membership and how open it wants to be to investment from outside of management. Whatever the choice, an indication of management structure is an important part of an operating agreement.
Business procedures important to running an LLC include voting, holding member meetings, approving manager actions, adding new members, facilitating member exits and even dissolving the LLC with wind-down procedures if the situation demands. These types of procedures—along with many more that might be relevant only to specific kinds of businesses—can be addressed in a variety of ways.
One of the main benefits of choosing an LLC as a business structure is the distinction that it makes between the company and its individual members. While corporate stockholders are personally shielded from their business’s liability, sole proprietors or members of a partnership are not legally distinct entities from their business and assume full personal responsibility for the risks of operation. LLCs combine the best characteristics of both structures, enjoying a corporation’s limited liability without shouldering its level of tax and regulatory burdens. LLCs need to properly define limited liability status with a clear liability statement in case this status is ever challenged. An operating agreement is one traditional place to declare this.
Operating agreements aim to proactively address bumps in the road ahead. As such, they often include provisions that describe what happens in the event of unplanned events such as a member’s death, a member’s withdrawal from the business, disputes between or among members, a need to edit the operating agreement and further issues particular to the business’s industry. Many agreements close out with a “severability provision” stating the rest of the operating agreement remains in effect if one part proves contrary to state or federal law or otherwise unenforceable.
