The Operating Agreement acts like a “partnership agreement” between the owners of a LLC. Important clauses for LLC Operating Agreements are critical, and a well-written and customized Operating Agreement for your business is essential to preventing very expensive problems from rearing their ugly heads years later.
The problem for many business owners, is they formed their LLC online themselves or hired a non-lawyer Internet company to form their LLC. Consequently, these folks either have no Operating Agreement, or they have a poorly written template that is not customized for the business.
The Operating Agreement isn’t an academic exercise or a document that collects dust in the back office. Instead, the Operating Agreement is absolutely critical to:
Control how decisions are made.
- Resolve and manage disputes between partners.
- Control how decisions are made.
- Enforce a tax policy and procedure that the IRS will use if it conducts an audit.
- Control how profits and losses are allocated and distributed.
- Control how the death or incapacity of an owner is dealt with, without interrupting the business.
- Maximize asset protection.
- Minimize the chances of “piercing the corporate veil” by a third-party lawsuit.
A free Operating Agreement template, or the template you received from a non-lawyer Internet company, will simply not have all the right language to meet your specific needs. You need a customized Operating Agreement. Does your LLC have a proper operating agreement?
Important Clauses for LLC Operating Agreements
Important clauses for LLC Operating Agreements include:
- Tax status of the LLC (i.e. disregarded, partnership, S-Corp or C-Corp)
What is the right tax status for my company?
- If Manager Managed, the powers and duties of the Manager
- If Member Managed, the powers and duties of the Members
- Member restrictions (i.e. non-compete, confidentiality, etc)
- How votes are conducted and interpreted, and how to resolve deadlocks
- How to resolve disputes
- How to allocate and distribute profits and losses
- How capital contributions are handled
- Dissolution and dissociation circumstances
- Preventing estates and spouses from taking ownership
- If Partnership, language regarding “Capital Accounts” and “Partnership Representative”
- Whether Membership is restricted, and whether the sale of ownership requires Right of First Refusal to other Members
If you’re considering using a free template Operating Agreement, consider our low-cost, customized Operating Agreement instead. We call it the Couture Operating Agreement, which helps you create a high-quality, highly customized Operating Agreement for your business. It’s just $29.95, although it’s free to anyone who forms a LLC or Anonymous LLC with us.