Your LLC's Operating Agreement (also called a Company Agreement) is a critical document governing your new business. While registering your LLC with the Secretary of State and getting an EIN helps legally establish your new business, an Operating Agreement is imperative: its basically your company's rule book! Because of its importance, many banks require a copy of your Operating Agreement before they will let you open a bank account. Among other things, your Operating Agreement will:
- Identify the initial Owners/Members of the LLC & their ownership percentages
- Explain how to add new Members
- Explain how much money (if any) each Member must contribute to the LLC.
- Explain how profits are distributed to the Members (usually in accordance with their ownership percentages)
- Explain how to appoint/remove Managers
- Describe the Managers' duties that are owed to the Company
- Govern what happens if a Member wants to leave the Company or sell his/her ownership to someone else
- Plans for the worst and explains what happens if a Member dies or gets divorce, or what to do if the Members and Managers can't agree on a critical issue and one Member wants to buy out the other (sometimes called Buyout Provisions, which are critical especially in 50/50 ownership LLCs).
- Creates a procedure for resolving disputes or overcoming deadlock.
- Puts in place voting rules and procedures, including specifying (a) what critical decisions must be voted on or otherwise approved in advance and (b) the rules for calling and holding meetings, voting on issues, and making key decisions.
- Explains how to appoint/remove officers and Managers
- Governs when and how your business can be sold, and the number of Members that have to approve such a sale.
An Operating Agreement is a key part of your business. It makes sure everyone is playing by the same rules and can help prevent many disputes before they even begin!