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Written by : Long Stiver
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an LLC operating agreement is a legally binding business document that entails the ownership of its members how the company is managed and the structure of the LLC or limited liability company it can provide details such as one meetings are held naming a registered agent selecting managers and adding and dropping members an LLC offers flexibility and combine the liability protection of a corporation with the tax treatment of a partnership you can file a simple certificate with the relevant state of formation an LLC will be governed by the state LLC laws what is the purpose of an LLC operating agreement it has many roles it defines the company's management structure it describes how the company's profits and assets are allocated and distributed it defines and sets out the agreements between the company's members members of the LLC are not personally liable or responsible for business debts and liabilities it is usually best to enter into the LLC operating agreement when the LLC is already formed main provisions in an LLC operating agreement an LLC operating agreement should include pre amiable the preamble dates and defines the agreement and includes the place of formation of the LLC operating agreement recitals recitals provide the basic information of the company for example when and why the LLC was formed if it is being formed as part of a larger transaction such as a joint venture or if the LLC operating agreement is being amended and restated definitions the LLC operating agreements can be long documents so it's a good idea to define the terms that are commonly grouped together for clarity organization matters this section includes the background details about the LLC such as the name addresses of the members when the LLC was formed the LLC's registered agent and the locations of its principal office the term of duration of the LLC and the LLC's business purpose members and LLC interests this section of the agreement includes matters relating to the members of the LLC and their LLC interests this section also provides information on any additional members and their liability management LLC's are managed by either one of its members called a managing member or by a separate manager on a board of managers managers are responsible for strategic decisions and the day-to-day running of the business capital contribution a capital contribution is the invested money or payment that a member makes to the LLC in exchange for its LLC interests in addition to identifying each member's initial capital contribution to the LLC this section usually includes other provisions relating to the capital contribution such as obligations to make capital contributions how additional capital contributions are called in what is known as a capital calls provisions governing member loans to the company the consequences of a default on a mandatory capital contribution LLC termination LLC operating agreements usually set out the different ways the LLC can be dissolved and the related procedures for dissolving and winding up the company's affairs specific dissolution events and the winding up processes vary among LLC's but these sections typically share similar concepts an LLC can be terminated when the expiration of a specific term established in the LLC operating agreement has been reached by the consent of all or some of the members a decree of dissolution or the sale of the company allocations and distributions are set out in the LLC operating agreement profits and losses are allocated among the members and how and when the company funds are actually distributed to the members what is to wind up an LLC it means to resolve and settle all of the company's liabilities and obligations close the business and sell all of the assets
Thanks for your comment Giovanni Eberline, have a nice day.
- Long Stiver, Staff Member
okay so you formed your LLC and somebody told you that you need an operating agreement what goes into that that's we're gonna talk about in today's episode hello my name is Jim Hart I'm the founding attorney here at Hawthorn law I started Hawthorn law and helped online entrepreneurs creators and visionaries like yourself figure out how to protect your business legally and grow something and build something that truly matters in the world and today what I want to talk to you about is your operating agreement and by the way if you're not sure what an operating agreement is or what it does I've got a link up here too for mistakes that entrepreneurs make when they're forming the LLC not happening operating agreement is one of them and we talked to you about that about why that is in that video so check that out an operating agreement does a lot of things basically what it is it is a contract between you as the business owner and you as the business owner if you're a single member LLC or your business partners if you are a multi-member LLC about how the business is going to be run different things that you're gonna do and we're gonna we're going to talk about all that here today what goes in the operating room it's basically the backbone of your business at the foundational document there's going to talk about everything you need to know about how to run and operate your LLC makes sense also does a huge thing is it keeps people from piercing the corporate veil if you've got an operating agreement in place and you can show that you've been following the operating agreement then if you ever were to get sued then it's gonna keep people from going through your business to try and get at your personal assets which is something that that that's one of the reasons we start an LLC it's called a limited liability company for a reason you're trying to limit your liability in the event something goes wrong with the business so let's talk about what goes into an operating agreement so the first section you want to have in your operating agreement is it's just a preliminary section that's gonna have a name your name the name of the business the purpose of the business who the registered agent is what your address is what state are you forming the business and all those type of things are going to go into this initial section of the operating agreement the next section of the agreement is going to talk about how the business is going to be managed and by managed I mean is it going to be member managed or is it going to be manager managed there's differences between those two that's probably a good subject for a future video make a note to self talk about member manage versus multiple member Vantage versus manager manage as a tongue-twister isn't it so that's the second secretary you need to make a decision about that a lot of people make mistakes when it comes to deciding how they want to manage their business and whether it's gonna be one or two one or the other and they just go and file their corporate paperwork and don't really think anything of that but it is an important decision if you if you did the wrong thing if you made a mistake don't worry you can change that later not a huge deal but that's just something you want to be aware of when you're drafting an operating agreement next section is who are the members of the LLC your going to have a list of all the members of the LLC it might be that it's just to you it might be that there's other people whoever it is you want to have a list and you want to include that in the agreement next section of the upper agreement how is your LLC going to be taxed you need to make sure you have that information in the agreement and you need to decide that ahead of time because there are strict deadlines as to when you can make these elections come on cycle whether you want to be taxed as just a sole sole proprietorship or partnership an S corporation or C corporation you need to make that election and you need to decide that and you should typically include that in the operating agreement cool makes sense good and by the way if you haven't already subscribed to the channel I would greatly appreciate if you just take a minute hit the little button down there below and hit the subscribe button hit the bell thingy so you'd notify whenever we post new videos every Tuesday and Thursday evening and also give us a thumbs up because we like the thumbs up I mean who doesn't like a thumbs up alright back to the list the next section of the operating agreement you want to put in there how much money are you going to contribute how much money are the other members are going to kind of contribute to the LLC one of the big benefits of an LLC versus other things is your ownership does not necessarily have to be in proportion to how much money you've contributed to the LLC with an S corporation for example if you're filing a straight S corporation and it's not an LLC you've got a corporate entity and then you made X election status the ownership interest in the corporation the shareholder interest has to be in proportion of the amount of money that was contributed that's not necessarily the case with an Alice see there's a lot of flexibility there in terms of you can one person contribute a lot of money and the other person can contribute a lot of sweat equity and they could be 50/50 members of an LLC which is a nice benefit to an LLC versus an S corporation that's just an aside next section you want to put in there is how and when our contributions and distributions can be made from the LLC so how much money are you going to be expected to put into the LLC on a regular basis or alternatively how are you gonna decide when distribution should be made from the LLC how are you decide how much money you're going to make in a salary versus distributions versus profit whatever you want to include something about that in your operating agreement but next you want to include just some general legal provisions in the operating agreement what type of Records are you going to keep who the officer is going to be of the LLC or you can vote yourself as a president or manager or something like that how often are you going to have meetings for the LLC annual quarterly something else all that needs to be included in the operating agreement and then you need to show that you've been actually following that so the last section well there's one other section after this but the last major section is how are you going to make changes or amendments to the operating agreement you want to include a section in there it talks about how you might make changes to the agreement if something were to happen and then the final section is going to be signatures and that's so that's where you and all the other members are going to sign the agreement to say that you basically ratify the agreement forming the LLC yada yada yada also you can include spousal a spousal consent if required by your state at the state where you're filing the LLC some states require to that some states don't you want to check with your state rules the other thing I'll tell you about
Thanks Ute your participation is very much appreciated
- Long Stiver
About the author
I've studied virology at Northeastern State University in Tahlequah and I am an expert in sports journalism / sportscasting. I usually feel envious. My previous job was recreational vehicle mechanic I held this position for 22 years, I love talking about glassblowing and harmonica. Huge fan of Paul Hollywood I practice ski jumping and collect sneakers.
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