What is an operating agreement? What is an operating agreement?

What is an operating agreement?

Establishing a business can be a huge task, and there is a lot to consider that can help or hinder the entire process. When you are hoping to structure your business by using a limited liability company (or LLC), one important piece of paperwork to have in your arsenal is an operating agreement. This will be drafted between all owners of the LLC and outline the rules and expectations for the running of the business; without one, entities will instead be bound by the default rules of the operating state.

What should be included in an operating agreement?

Of course, every business is different, so while there are state rules for businesses to both use and adhere to, these won’t always be relevant or functional. This is where outlining your own operating agreement can come in handy. Having your own operating agreement written up will give you better control of your business with the freedom and protection you need to remain functional and compliant. The good news is that even if you have established your LLC but haven’t written an operating agreement just yet, you can do so at any time as long as all members are in agreement. It can be edited and modified at any stage, with the support of an experienced service provider.

An operating agreement can be as basic or extensive as you feel it needs to be, but there are quite a few key points that should be included to ensure that the document will comprehensively fulfill your needs. The most common components of an operating agreement will cover:

  • Each member of the LLCs ownership (written in percentages), 
  • A statement or list of the business’s purpose,
  • The responsibilities of each member and their voting rights, 
  • Any rules regarding taking votes during meetings,
  • Buyout and buy-sell provisions in case a member leaves the LLC,
  • A clear overview of the duties and powers of each member,
  • An outline of what will happen in the event of a member’s departure from the business (including death),
  • Any expectations or issues that will relate to the overall management of the LLC,
  • A statement that covers the intent of the formation of the business (including how new members will be handled, how the LLC would like to be taxed, how long the business intends to operate, etc.),
  • The business’s location.

Do I need an operating agreement?

It can be extremely worthwhile for a business to have an operating agreement, as having everything laid out in a concise document will provide a clear, tangible, legal reference point for members. Having this information on hand will minimize any misunderstandings that may arise and potentially help businesses avoid disputes and support themselves legally.

Is an operating agreement required for an LLC?

It may be worthwhile to know that an operating agreement isn’t a legal requirement for an LLC, except in the states of California, Maine, Missouri, and New York. It is required for single-member LLCs in New York, Missouri, and California as well. Even if you want to set up your company in a state where this isn’t a requirement, an operating agreement is an extremely important piece of information to have when outlining the things that you need for your business. It will define your goals and values and offer a more objective assessment of how everything is functioning. Just because it isn’t required by law doesn’t mean it isn’t necessary or extremely worthwhile for new businesses to have a clear record of how they expect their business to function and grow in the future.

How to write an operating agreement

Compiling an operating agreement doesn’t have to be as difficult as you might first think. If you are unsure about anything, you can always contact a reputable service provider that will help you get your business up and running correctly and with little fuss. Here is a quick look at what you need to cover when writing a worthwhile operating agreement that will perform as you’d expect.

1. Determine ownership percentages

The opening section of your operating agreement should cover the personal information of the members of your LLC, including names, addresses, and roles or titles within the business. Alongside this, the ownership percentages should be displayed and will clearly define each person’s ownership of the company. It should be decided between each founder in advance.

2. Outline the rights and responsibilities of each member of the LLC

This is the most crucial part of your operating agreement and should include every member’s voting rights, daily duties, performance requirements, and hourly or salary pay. This section of your operating agreement should lay the foundation for the scalability and future success of your business.

3. Expectations for the creation and termination of roles

This is the section for defining the terms of joining or leaving your LLC, so create an action plan for incorporating new LLC members and legally supporting yourself and your members if they decide to leave (or in the unfortunate occurrence of somebody’s death).

4. Actions for dissolution 

The 4th section of your operating agreement should outline the dissolution terms, in case your LLC needs to be closed. Include instructions as well as the duties and responsibilities of each member of the LLC if dissolution occurs. It should include what will happen to any company debt, how remaining assets should be divided among members, and the duties, regulations, and rules for each individual that will be involved.

5. Legal coverage

The last step will require a severability clause to be added to protect the terms contained within the agreement in case any aspects may come into conflict with state or federal law. This should outline that if any parts of the agreement are considered conflicting at any time, the rest of it will still be legally standing.

How much does an operating agreement cost?

As you will need the support of a company formation service provider or similar legal entity to help you compile a comprehensive yet functional operating agreement, you can expect to pay around $400.

Let Workhy set up your LLC and prepare your operating agreement

When it comes to finding the right company formation services for your needs, look no further than Workhy. We help individuals and entrepreneurs worldwide to establish their companies online in the US by complying with all the correct laws and regulations, without having to be based within the country. If you decide to set up your company with Workhy, you can also get help preparing your operating agreement at a very affordable price as part of our starter package. We offer additional services including bookkeeping and tax filing, registered addresses, EIN & ITIN applications, opening online bank accounts, and more. For detailed information about Workhy and what we provide, you can check out our website.

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