An attorney creates an Operating Agreement (also called LLC Bylaws, Operations Agreement or Setup Agreement) when starting a business. The Operating Agreement provides structure to the businesses financial and functional decisions, defines the operating terms of the LLC, and helps to avoid or at least eliminate risks of future disputes among members of the LLC. Most unnecessary disputes happen when there is no Operating Agreement prepared for an LLC. Most states do not require an Operating Agreement nor do they need to be filed with the state. However, it is unwise to operate a business without one. Operating Agreements are necessary to eliminate misunderstandings regarding financial and managerial issues. The operating agreement can be seen as the rules the LLC will follow.
Terms that need needs to be included in the Operating Agreement will depend on the LLC’s situation and individual needs. Often the Operating Agreement will include the following:
- Name of the LLC and state it was incorporated in;
- The purpose and detail of the LLC;
- The percentage of each owners’ interests;
- How much (if any) of the profits and losses will be distributed;
- The amount of Voting powers of each member;
- How decisions will be voted on and how meetings will be held;
- How the LLC will be managed;
- An outline of each members’ rights and responsibilities (including accounting responsibilities); and
- Ownership Transitions (including buyout and buy-sell provisions that outlines the process if a member wants to sell their interest, dies, or becomes disabled).
In addition to the Operating Agreement, an LLC should have the following documents:
- Articles of Organization or Articles of Incorporation;
- Written Action of Organizer; and
- Written Action of Board in Lieu of First Board Meeting.
All company documents should be kept together in a company records book. Occasionally, banks will require an Operating Agreement prior to an LLC opening a bank account.