If you own a limited liability company in or around Los Angeles, chances are you’re somewhat familiar with an important document: your company’s operating agreement. If you are looking to form an LLC, this is a must read article.
An operating agreement is a type of business contract that contains provisions that govern the operation of an LLC. Think of it as the LLC equivalent of a corporation’s bylaws.
What should be included in an operating agreement?
An OA must include a detailed listing of the terms and conditions agreed to by the LLC owners, including any contingencies that may arise to protect the LLC owners.
You should describe the specific protocols and policies both for the day-to-day operations of the business and for any unique circumstances. For example, the agreement must contain provisions that govern what happens if a member decides to leave the LLC. It should also address what to do if an owner dies or divorces their spouse. The agreement should also explain the duties and responsibilities of the members for the day-to-day operations of the business.
In California, the legal authority governing LLC formation does not require an operating agreement (although it is worth noting that Corporation Code § 17701.02(s) defines the term “operating agreement”).
Although not legally required, having one is highly recommended for an LLC, as it is a document that can help protect you and your business. If you form an LLC without an official operating agreement, you will be at the mercy of the state’s default provisions regarding operating a business, which may not be what you want. For example, some states require that a company’s profits be divided equally among members. If you and your business partners have a separate profit-splitting arrangement, but lack an operating agreement, you put yourself at serious risk if a conflict with your colleagues arises in the future.
Provisions to include in an operating agreement
The great thing about having an OA is that you can customize them to fit your business needs. However, there are certain provisions that you should make an effort to include in your agreement, including:
• Definitions of key terms used throughout the agreement;
• Official name of the limited liability company;
• The date the LLC was formed and the general purpose for which the LLC was formed.
• The period of time in which the LLC plans to be in operation. In most cases, the duration is “perpetual” unless a specific number of years is designated.
• The address of the main office, the name of the Registered Agent (to whom the legal documents are sent), and the address of the Registered Agent.
• Contributions of each member and the nature of their contribution (for example, cash contributions, real estate, intellectual property).
• Responsibility of the Partners Declaration that the debts, obligations and other responsibilities belong to the company, not to the partners.
Talk to an attorney for assistance in properly preparing and filing an operating agreement
Although it is possible to prepare an LLC operating agreement yourself, you may want to take the time to speak with an experienced business contract attorney in Los Angeles. Having legal counsel will help ensure that your agreement contains the necessary provisions and does not leave out any critical provisions or issues.
