What is an LLC Operating Agreement?

Discover the importance, content and costs of an LLC Operating Agreement. Protect your assets and avoid conflicts between partners, read more here!

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Juanma Aranda

The LLC (Limited Liability Company) Operating Agreement is a legal document that sets forth how the LLC will operate.

Although not always required by law, this agreement is highly recommended, as it details the internal rules, the rights and duties of the members (owners or partners), and how aspects such as finances and decision making will be managed.

When is it convenient or mandatory to have an Operating Agreement?

Although in some U.S. states it is not mandatory to have an Operating Agreement, such as in New Mexico, it is still a highly recommended practice for several reasons:

  1. Protection of personal liabilityBy having this document, you reinforce the legal separation between the assets of the LLC and your personal assets. In case of legal or financial problems, this document can be a proof that the LLC is a separate entity.
  2. Avoid disputes between membersIf there is more than one member in the LLC, it is vital to be clear about the rules of the game from the beginning. The Operating Agreement defines who makes decisions, how profits are distributed and what happens if a member wants to leave.
  3. Comply with banking requirementsMany financial institutions require an Operating Agreement to open a business bank account.
  4. Comply with state lawsAlthough not all states require it, having one can help you be in a better position for any legal changes.

Where should it be submitted or registered?

The Operating Agreement does not show up or register in any public office in most states, including New Mexico. This is a document internal of the LLC.

However, it is critical that all members of the LLC have a copy and that it be kept with other important company documents, such as the articles of incorporation.

What data should an Operating Agreement contain?

An Operating Agreement may vary in length and detail depending on the complexity of the LLC, but should include the following basic elements:

  1. LLC InformationThe official name of the LLC and its address.
  2. PropertyA list of all the members of the LLC, their participation in the company (ownership percentage) and what rights each one has.
  3. ManagementSpecify whether the LLC will be managed by the members or by designated managers.
  4. Profit and loss sharingHow profits and losses will be divided among members, and when distributions will be made.
  5. Decision makingRules on how important decisions will be voted on, how many votes a decision needs to be approved, and which decisions require a unanimous vote.
  6. Capital contributionsDescription of how much money or assets the members have contributed to the LLC.
  7. Exit proceduresWhat happens if a member wishes to leave the LLC or dies.
  8. Dissolution of the LLCRules on how assets will be liquidated if the LLC is dissolved.
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How much does an Operating Agreement cost?

The cost of an LLC Operating Agreement can vary considerably depending on how you choose to obtain it:

Do it yourself using a free template

There are many templates available online for free on websites such as Rocket Lawyer, LegalZoom o Nolo. If you choose this option, the cost will be almost nullIt is important that you customize the document according to your needs and ensure that it complies with the applicable legal requirements.

Online services to create the Operating Agreement

If you prefer something more customized, some online platforms offer help in creating an Operating Agreement more tailored to your LLC. These services usually charge between 39 and $200. Some examples are:

  • LegalZoomThe Operating Agreement is offered as part of its LLC training packages, which range from $79 and $349depending on the level of service.
  • Northwest Registered AgentThey often include the Operating Agreement when you engage their services to set up an LLC or act as your registered agent, with packages ranging from $39 and $225.

Hiring a lawyer

If you want to make sure that the Operating Agreement is fully tailored and adapted to your specific situation (especially if you have a more complex LLC or several members), you can hire a specialized lawyer. E

he cost of this option varies, but can be in the range of $500 to $2,000depending on the complexity of the LLC and the services of the attorney.

Which option to choose?

  • If your LLC is simple and you want to save costs, a free template may be sufficient.
  • If you prefer more customization but do not need a lawyer, an online service is an intermediate option in terms of cost and customization.
  • If your LLC is more complex or you need specific legal advice, investing in a lawyer is the most advisable.

Single-member LLC vs. multi-member LLC

There are key differences between the Operating Agreement of a single-member LLC and a multi-member LLC (with two or more members). These differences reflect the structure and internal dynamics of each type of LLC.

Ownership and management

  • Sole Proprietorship LLCSince there is only one member, the Operating Agreement is much simpler in this respect. The document simply confirms that the LLC has a single owner, who generally manages the business and makes all decisions.
  • Multi-member LLCThe Operating Agreement should clearly specify the property of each member, its percentage of participation and its voting rights. In addition, it must include provisions on the managementThe company will either be managed by the members themselves or one or more external managers will be appointed.

Profit and loss sharing

  • Sole Proprietorship LLCSince the single member receives all the profits and bears all the losses, it is not necessary to establish how they are distributed among several members. Profits are usually deposited directly into the owner's personal account.
  • Multi-member LLCThe Operating Agreement should detail how profits and losses will be shared among the members, which may depend on their percentage of ownership or any other agreement among them. It is also important to specify when y how these distributions will be made.

Decision making

  • Sole Proprietorship LLCThe Operating Agreement: Decisions are made by a single person, so there is no need for formal voting or consensus processes. The Operating Agreement simply reaffirms that the single member has absolute control.
  • Multi-member LLCHere it is necessary to include clear rules on how important decisions will be made. The document may state, for example, whether majority or unanimous votes are required for certain issues, and how conflicts between members are resolved.

Capital contributions

  • Sole Proprietorship LLCThe owner usually makes an initial capital contribution and, in some cases, may add additional funds. These contributions must be recorded, although there are no complications from sharing financial responsibilities.
  • Multi-member LLCThe Operating Agreement should specify how much capital each member has contributed and whether additional contributions are expected in the future. It may also include provisions on what happens if a member fails to meet its financial commitments.

Departure of members and dissolution

  • Sole Proprietorship LLCAs there is only one member, the rules on exit of members or dissolution are usually simpler. If the sole member decides to dissolve the LLC, it can simply do so by following the necessary legal steps.
  • Multi-member LLCIt is essential to include in the Operating Agreement rules about what happens if a member wishes to leave the LLC, if he dies or if he wants to sell his interest. It should also specify how decisions will be made in the event of dissolution of the LLC and how assets will be divided.

Protection of personal liability

  • Both in the Sole proprietorships LLCs as in the multimemberThe Operating Agreement helps to formally establish that the LLC is a separate legal entity, which reinforces the personal liability protection of the owners.

Formality in the management of the company

  • Sole Proprietorship LLCAlthough it is advisable to follow certain formalities (such as opening a separate bank account for the LLC), the level of formality is generally lower than in a multi-member LLC.
  • Multi-member LLCMore formality is required, especially in terms of documenting meetings and decisions. The Operating Agreement should establish how meetings will be conducted and how important decisions will be documented.

Summary of differences

  • Sole Proprietorship LLCSimplicity in structure and decision making, as everything falls under one person. The Operating Agreement is simpler, focused on aspects of ownership and personal responsibility.
  • Multi-member LLCMore complexity, since the relationship between the different members must be regulated. The Operating Agreement should cover aspects such as shared management, distribution of profits, dispute resolution and exit of members.

Each type of LLC has its own needs, and the Operating Agreement must reflect these differences to ensure good business management.

Conclusion

Having an Operating Agreement for your LLC is essential, even if it is not a legal requirement in all states. This document helps protect your interests, clarifies the company's internal rules and improves the day-to-day management of the business.

You can start with a basic template, but consider customizing it or consulting a professional to adapt it to your LLC's circumstances.

Frequently Asked Questions about the LLC Operating Agreement

What is an LLC operating agreement?

The LLC operating agreement is a fundamental document that establishes the internal rules and guidelines for the operation of the company. This agreement defines the organizational structure, the rights and responsibilities of the members, as well as the procedures for decision making. Without an operating agreement, LLCs may face difficulties in managing and resolving conflicts.

Key elements typically included in an operating agreement include:

  • Profit and loss sharing
  • Voting procedures
  • Member rights
  • Dissolution process

What do the operating agreements mean?

The operating agreements are fundamental documents for LLCs (Limited Liability Companies) that establish the rules and guidelines for the operation of the company. These agreements define the organizational structure, member responsibilities and internal procedures, providing a clear framework for decision making.

A typical operating agreement includes aspects such as:

  • The roles and responsibilities of the members.
  • How profits and losses are distributed.
  • Procedures for the admission of new members.
  • The rules on the dissolution of the LLC.

By having a well-defined operating agreement, LLCs can avoid conflicts and misunderstandings among members, ensuring a more efficient and harmonious management of the company.

What are operational agreements?

Operating agreements are legal documents that establish the rules and guidelines governing the internal functioning of an LLC (Limited Liability Company). These agreements are essential to define the organizational structure, the rights and responsibilities of the members, as well as the procedures for decision making.

Key elements that are typically included in an operating agreement include:

  • Distribution of profits and losses.
  • Decision-making process.
  • Rights and duties of members.
  • Procedures for the incorporation of new members.
  • Conditions for the dissolution of the LLC.

What is an operating agreement?

The Operating Agreement of an LLC (Limited Liability Company) is a legal document that establishes the rules and guidelines for the internal operation of the company. This agreement details key aspects such as ownership structure, member responsibilities, distribution of profits and losses, as well as decision-making procedures. Although not always mandatory, having an Operating Agreement is essential to avoid disputes and ensure a clear and efficient management of the LLC.

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