While Operating Agreements may not be required in many states, most, if not all, authorize the use of Operating Agreements for limited liability companies (LLCs).
Why are Operating Agreements so critical? Because they help to define the rights, obligations and relationships between all those involved in the LLC. As I often tell clients – every partnership is a great one…until it’s not. And when it stops being great, or the parties want to go in different directions, having an agreement that can guide a resolution or decision making authority is key.
Members, managers and the company can generally agree to operate the LLC in any manner they want so long as it is in compliance with applicable law. While Operating Agreements can cover a myriad of issues there are generally five areas that most members and managers will turn to for guidance, and therefore are areas that are worthy of careful consideration when entering into an Operating Agreement.
1. Manager Authority: This section will set forth what decisions the manager of the LLC can make without member input. This might be all day to day decisions, but not major decisions or some variation of that.
2. Member Decisions: The extent to which the members have a vote on certain LLC business can be minimal or broad. Often members will want to retain the right to vote on new managers, the ability of the LLC to borrower money, dissolution of the LLC or amendments to the Operating Agreement.
3. Duties: Most states provide a statutory framework for certain duties that managers may owe to the company and/or members. These usually include certain fiduciary duties and duties of care. These duties can often be expanded or narrowed by agreement of the parties in an Operating Agreement.
4. Allocations and Distributions: Operating Agreements can specify how the company will allocate and distribute profits and losses to the members. Members have the flexibility to create preferred returns, allocations of profit and loss that are different that ownership interests and many other structures for the allocation and distribution of profits.
5. Transfer of Membership Interests: How, when and if members can sell their interest or otherwise withdraw from the LLC is very important. The Operating Agreement can provide for very restrictive transfer and withdrawal rights or very liberal transfer rights. It is important that members understand any limitations on their ability to sell their interest or otherwise withdraw from the LLC.
Operating Agreements can cover many issues. The five noted above are some of the key issues that we find are often important to clients. The flexibility of the LLC structure and Operating Agreement provisions are what make LLCs a very attractive entity structure for many people. Incline Law Group, LLP can assist you with preparing an Operating Agreement as well as the formation of an LLC in Nevada or California.