The LLC Operating Agreement plays a pivotal role in the functioning of a Limited Liability Company (LLC). This document not only establishes the ownership of the LLC but also outlines its management structure. It is crucial for every LLC to have an Operating Agreement in place to avoid potential disputes and disagreements.
Owners of LLCs recognize the benefits of forming an LLC, such as limited liability protection and various tax advantages. However, many overlook the importance of the LLC Operating Agreement after forming their LLC. It's essential to remember that forming an LLC under state law is just the initial step in organizing an LLC. The LLC Operating Agreement is a critical component that should not be neglected.
Interestingly, when an LLC is formed under state law, it doesn't have any members (owners) unless they are explicitly mentioned in the Articles of Organization. As most state LLC laws don't mandate the inclusion of members in the Articles of Organization, a staggering 98% of new LLCs lack members immediately after formation.
The LLC Operating Agreement is typically used to issue ownership interests in an LLC. Therefore, its primary purpose is to identify the owners of the LLC and define their rights and obligations towards each other and the LLC. Relying on verbal agreements regarding ownership and voting rights can lead to disputes, especially when the LLC starts generating substantial profits.
Another advantage of an LLC is the flexibility it offers its members in deciding how to run and operate their business. The LLC Operating Agreement plays a crucial role in establishing the management structure of an LLC. It allows the members to decide whether they will have the authority to make decisions for the LLC or if they will appoint managers for this purpose.
While each state's LLC laws provide default provisions for managing an LLC in the absence of an Operating Agreement, relying on these can be risky. Many of these default laws can be grossly unfair to the members of the LLC and may not align with their intentions.
The LLC Operating Agreement is a vital document that determines the two most critical aspects of an LLC: the ownership and management structures. Without a comprehensive LLC Operating Agreement detailing these aspects, an LLC is at a high risk of encountering disputes and other potential issues due to an incomplete organizational structure. Therefore, it is crucial for every LLC to have a well-drafted Operating Agreement in place.
