Have you decided to structure your business as a Limited Liability Company (LLC)? It is a popular choice because it is simple to set up and has minimal compliance requirements. You can also rest easy knowing that your personal assets are protected by the LLC structure. To set up your LLC, you will need to file articles of organization in your state. While not required, you should also consider establishing an operating agreement. Why take on the paperwork that is not required? An operating agreement can set some ground rules in place for how the LLC will be managed and operated. This extra bit of work on the front end can go a long way to preventing and resolving potential problems and bottlenecks down the road.
Consider developing an operating agreement for your LLC. Make sure you understand what it sets forth. Make sure the members of the LLC understand what it sets forth. Here, we will detail a few key provisions that you should be sure to include in your LLC operating agreement.
What to Include in an LLC Operating Agreement
Your LLC operating agreement does not have to be too lengthy to be effective. There are a few important points you should be sure to set forth. First, outline the percent of ownership among those who hold ownership interests in the LLC and detail how profits will be distributed. Your LLC has some options on how to distribute properties and how ownership interests will be designated. Some LLCs, for instance, assign ownership percentages based on the total funds invested into the LLC. In other cases, more equal ownership percentages are assigned. Furthermore, you have the ability to offer flexibility in the distribution of business profits but should make it clear how this will happen. Will profit percentage directly correlate to a member’s ownership percentage? Would a different arrangement work better? Make a decision and clearly state it in the operating agreement.
Your operating agreement should also detail the management structure of the LLC as well as the roles and responsibilities of the LLC members. Some LLCs are member-managed. This is where the LLC owners are also responsible for the day-to-day business operations of the LLC. Other times, an LLC will choose to be manager-managed.
There will be many decisions that will need to be made in the course of operating your LLC. Establish a decision-making procedure upfront to help streamline the process. For decisions that require a member vote, will a majority be required or will only a unanimous agreement suffice? How will voting power be assigned to the LLC members? Oftentimes, LLCs go with a member’s voting power being proportional to the member’s ownership percentage, but you may prefer a different method.
Outlining exit strategies can also be a critical part of an operating agreement. What will happen if a member wants to leave the business? What will happen to that member’s ownership interests? While you may not want to think about the end of your business right when you are just starting out, you should also detail how to dissolve the business and how assets should be divided once the debts of the LLC have been satisfied. These are things that you can establish at the beginning so that you are not left scrambling if and when the situation arises.
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