Why an Operating Agreement Is an Absolute Necessity When Starting a Business

If you own a small liability company around or in Los Angeles, you’re likely somewhat knowledgeable about an essential document – the operating agreement on your business. If you’re looking to make an LLC, this is a must-read article.

An operating agreement is a kind of business contract containing provisions that govern the process of an LLC. Think of it as the LLC-equivalent to by-laws to get a corporation.

What Should Be Included in an Operating Agreement?

An OA will include expose recitation of the terms and conditions consented to from the owners from the LLC, including contingencies that could arise in order to protect the LLC owners.

It should describe the particular protocols and policies both for day-to-day operations with the business as well as any unique circumstances. For example, the agreement should contain provisions governing what happens in case a member decides to depart in the LLC. It must also address how to handle it automobile owner passes away or gets divorced from their spouse. The agreement also need to explain member duties and responsibilities to the daily operations of the business.

In California, the statutory authority governing the development of LLC’s do not require an operating agreement (though, it really is worth noting that Corporations Code ยง 17701.02(s) defines the word “operating agreement”).

Despite not being the best obligation, having one with an LLC is strongly recommended since it is a document which will help protect you, plus your business. If you form an LLC without an official operating agreement, you will end up at the mercy from the state’s default provisions concerning the operation of a business, which can not be what you want. For example, some states require that profits from a business be divided equally between members. If you and your business partners have a different arrangement to the division of profits, but lack an operating agreement, you happen to be exposing yourself to serious risk in case a conflict were to occur later on along with your colleagues.

Provisions You Should Include in an Operating Agreement

The wonderful thing about using an OA is that you can individualize them to fit the requirements of your organization. Nevertheless, there are specific provisions you need to seek to include in your agreement, including:

  • Definitions of key terms used through the entire agreement;
  • Official name from the limited liability company;
  • The formation date in the LLC and the general purpose which is why the LLC was formed.
  • The length of time where the LLC intends to be in operation. In most instances, the length is “perpetual” unless a unique number of years is designated.
  • The address with the principal office, the name of the Registered Agent (to whom legal documents are sent), and the address in the Registered Agent.
  • Contributions of each and every member and the nature of their contribution (e.g., contributions available as cash, real property, intellectual property).
  • Liability of Members Statement that the debts, obligations, and also other liabilities are part of the corporation, to not the members.

Speak with an Attorney For Assistance in Properly Preparing and Filing an Operating Agreement

Though it really is possible to prepare an LLC operating agreement yourself, it would have your best interest to take the time for you to talk to an experienced business contract lawyer in Los Angeles. Having an attorney will help ensure your agreement provides the necessary provisions and does not leave any critical issues or stipulations out.