An Operating Agreement is a document that outlines the ownership and operating procedures of a business, such as a limited liability company (LLC). It is a legally binding agreement between the members of the LLC that outlines the ownership percentages, roles and responsibilities of each member, voting rights, and how profits and losses will be distributed. Operating Agreements are required in some states and highly recommended in all states. The two main types of Operating Agreement are single-member LLC Operating Agreement and multi-member LLC Operating Agreement. A single-member LLC Operating Agreement is used when a business is owned and operated by only one person, and sets out the terms and conditions of the business's ownership and operations. A multi-member LLC Operating Agreement is used when a business is owned and operated by two or more people, and sets out the terms and conditions of the business's ownership and operations. It also outlines the members' roles and responsibilities, how profits and losses will be distributed, and voting rights.
Operating Agreement
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FAQ
A better name for an operating agreement might be a membership agreement. This agreement is similar in form to a partnership agreement for a business partnership.
Why do you need an operating agreement? To protect the business' limited liability status: Operating agreements give members protection from personal liability to the LLC. Without this specific formality, your LLC can closely resemble a sole proprietorship or partnership, jeopardizing your personal liability.
Most states do not require LLCs to have this document, so many LLCs choose not to draft one. While it may not be a requirement to have an operating agreement, it's actually in the best interest of an LLC to draft one.
What Should be Included in an Operating Agreement? Names, addresses, and titles of each member. Ownership percentages. Member rights and responsibilities. Responsibility, liability, and powers of members and/or managers. Profit and loss distribution. Buying and selling rules. Dissolution instructions. Meeting guidelines.
Bylaws are similar to operating agreements, except they're used in corporations (S corporations and C corporations) instead of LLCs, and they often have statutory requirements for the information they include.
Get together with your co-owners and a lawyer, if you think you should (it's never a bad idea), and figure out what you want to cover in your agreement. Then, to create an LLC operating agreement yourself, all you need to do is answer a few simple questions and make sure everyone signs it to make it legal.
What Should be Included in an Operating Agreement? Names, addresses, and titles of each member. Ownership percentages. Member rights and responsibilities. Responsibility, liability, and powers of members and/or managers. Profit and loss distribution. Buying and selling rules. Dissolution instructions. Meeting guidelines.
Negotiate and execute an operating agreement. North Carolina does not require an operating agreement in order to form an LLC, but executing one is highly advisable.