An operating agreement is a crucial document for limited liability companies (LLCs) that defines the business’s financial and operational guidelines, including its rules, regulations, and provisions. This document helps tailor the internal operations of the company to meet the specific needs of its owners.
Although the format and content of an operating agreement can vary, it typically includes key sections such as Organization, Management and Voting, Capital Contributions, Distributions, Membership Changes, and Dissolution.
Organization
The first section of the operating agreement covers the company’s establishment, detailing its founding date, the members involved, and the ownership structure. If there are multiple members, ownership may be divided equally or in varying amounts based on “ownership units.”
Management and Voting
This section outlines how the company is managed and how decisions are made. The company might be managed by a member appointed by the others. The operating agreement specifies the authority members have in company affairs and the voting process for making decisions. It may also set the number of votes required for certain actions.
Capital Contributions
This part addresses the initial funds contributed by members to start the LLC, listing which members have provided capital and how additional funds will be raised.
Distributions
This section explains how profits and losses are distributed among members. Distributions can include physical property or other business assets.
Membership Changes
This part details the process for adding or removing members, including scenarios such as ownership transfers due to a member’s death or bankruptcy.
Dissolution
This section defines the circumstances under which the company will be dissolved, often referred to as “winding up.”
While most states do not require an operating agreement, it is highly recommended for multi-member LLCs to establish clear financial and organizational structures. In Delaware, having an operating agreement is mandatory.
Minutes
Minutes are detailed records taken during meetings of LLC members or owners. The first meeting, held when the company is formed, is especially important for organizing all aspects of the business. Meeting minutes should document the date, time, and location of the meeting, the results of any votes, and any updates on business goals and management structures.
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