Operating
Agreements and LLCs
An operating agreement is
a legal document used by members of an LLC governing the management of the
LLC. The operating agreement structures
the financial and functional decisions of the business. When creating an operating
agreement, there are key components that are essential within the document.
Membership
Interest
A member’s membership interest is often expressed as a percentage
interest. It can vary as new members are added. Membership interest is
comprised of two components: (i) an economic interest and (ii) a management
interest. Often, membership interest is expressed in units. Some LLCs even
refer to their units as “shares” and have an authorized and issued number of
shares, just like a corporate structure.
Capital Contribution
Initial percentage interests are determined based upon value given to
initial capital contributions. A member's capital contribution to the LLC may
take the form of cash, property, services rendered, a promissory note, or some
other obligation to contribute cash or property or to render services, or any
combination of the foregoing. If a member contributes property or something
other than cash, the value of such contribution often gets negotiated. Also,
members need to address in the operating agreement whether there will only be
initial capital contributions, or whether members will be asked to make ongoing
contributions or there will be potential future capital calls.
Allocation of Profits, Losses, and
Distributions
The operating agreement may provide each class of units with unique
economic rights and may even alter the allocation rules between members of the
same class. Members of the LLC will need to decide how these rules will operate
as it pertains to each member.
Death/Disability
This section of the operating agreement will determine will be responsible for making decisions for you or inherit your shares in the company upon death or disability.
Dissolution
The dissolution clause of
the operating agreement is an important component if it becomes necessary to
dissolve the business. The dissolution clause provides an exit strategy for you
and you and your partner(s) if there are individuals who would like to exit the
business or close the business.
As you are planning your
business strategies and long term goals, an operating agreement is essential in
organizing your LLC. MyLegalEdge.com
can provide your business with a needed operating agreement and other
supplemental business forms. MyLegalEdge - Legal Forms Made Simple.
