An operating agreement is an important legal document that defines the limited liability company’s (LLC’s) rules and regulations for both the financial and functional decisions of the company.
The operating agreement governs the operations of the business to address the needs of the business and its owners. The operating agreement serves as a legally enforceable contract binding the company’s owners to its terms. Many states in the United States require an LLC to have an operating agreement. If an LLC does not have an operating agreement, it is governed by the state’s default rules contained in the state’s laws and further refined through court decisions. An operating agreement is analogous to corporate by-laws for a corporation, or a partnership agreement in a partnership. In single-member LLCs, an operating agreement is a declaration of the structure that the member has chosen for the company and sometimes used to prove in court that the LLC structure is separate from that of the individual owner and therefore necessary so that the owner has documentation to prove that he or she is indeed separate from the entity itself.
The operating agreement usually includes percentage of interests, allocation of profits and losses, member’s rights and responsibilities, and other provisions. Operating agreements are legally significant. Having a correctly drafted operating agreement is crucial in case legal disputes arise between the owners of an LLC.
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