What should business owners include in an operating agreement?
Agreeing with others is sometimes difficult in our daily lives. Now imagine how difficult it can get when more than two people manage a company. An operating agreement can avoid conflicts and misunderstandings by outlining the rules of the company and the roles of each member. If you are planning to be part of a limited liability company (LLC), you must create this agreement with the other members. You can make the most out of the agreement by knowing which clauses offer the most legal protection.
Operating agreements and LLCs
One of the key characteristics of an LLC is that its business members are not personally liable for any lawsuits or legal actions that the company faces. However, an LLC without an operating agreement would not offer this protection. That is why the law in California requires LLCs to have operating agreements in place, even if this agreement is not needed in the application to form the company.
An operating agreement is crucial in LLC structures because it sets a legal boundary between the company and its members. This document also prevents disputes by outlining the functionality of internal affairs. The terms of the agreement must fit the members’ needs and wishes, but some of the things that are useful to include in this document are:
Which members have voting rights and which responsibilities come with that right
The percentage of ownership of each member
A layout of the power and duties of each member
How meetings are held and when
How the distribution of profits and losses will be
How issues related to the management of the LLC must be solved
What will happen when a member leaves or enters the company
How new members should be handled
How long the company intends to operate
The more specific the agreement is, the better. After the members sign the agreement, they will have to abide by the rules and respect the terms.
A customized agreement
As a future member of an LLC, you must create an operating agreement to avoid misunderstandings, disputes and liability for any actions taken against the company. The more terms you include in the agreement, the more protection and stability it will offer. However, the terms that you must include will depend on the specific nature and circumstances of your company.
For more information please contact Thakur Law Firm. We have two offices in California: a Southern California office in Fullerton and a Northern California office in Pleasanton. For more information, visit www.thakurlawfirm.com.