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Creating an LLC Operating Agreement

November 27, 2021
By James Gussie

Running your business is simple when you use the right tools. This article provides you with all of the information needed to create an LLC operating agreement, including how long it should be and what types of entities can exist in this type of partnership.

The “50/50 llc operating agreement template” is a document that can be used to create an LLC Operating Agreement. It has 50% of the company owned by two or more people, and the other 50% owned by one person.

An LLC operating agreement enables you to arrange your financial and working ties with your co-owners in a manner that is beneficial to your company. You and your co-owners determine each owner’s proportion of ownership in the LLC, his or her share of earnings (or losses), rights and duties, and what will happen to the company if one of you departs in your operating agreement.

Why is it essential to have an operating agreement? While many states do not need your LLC to have an operating agreement, even if you are the only owner, it is stupid to operate an LLC without one. An operating agreement protects your LLC’s limited liability status, avoids financial and management problems, and ensures that your company is controlled by your own rules rather than the state’s default regulations.

Keeping your limited liability status protected The primary reason for drafting an operating agreement is as straightforward as it is crucial: it ensures that courts will recognize your limited personal responsibility. This is especially important with a one-person LLC, since without the formality of a contract, the LLC will resemble a sole proprietorship. Simply having a proper written operating agreement will give legitimacy to your LLC’s distinct existence.

Creating a financial and managerial framework Profit-sharing and decision-making processes, as well as procedures for dealing with member departures and additions, must all be documented in co-owned LLCs. You and your co-owners will not only be ill-equipped to resolve disputes over money and management if you don’t have a comprehensive operating agreement, but you’ll also be subject to the restrictions of your state’s legislation (see below).

Default state rules are overridden Each state has laws that establish fundamental LLC operating standards, some of which will apply to your company unless your operating agreement specifies otherwise (these are known as “default rules”). Many states, for example, have a default regulation requiring LLC members to split earnings and losses equally, regardless of how much each member invested in the company. Unless you and your co-owners put equal money into the LLC, you’re unlikely to desire earnings distributed this manner. To prevent this, your operating agreement must specify how earnings and losses will be shared between you and your co-owners.

Similarly, many state regulations governing LLCs will be unfavorable to your company. Don’t let them build an LLC for you; instead, come up with the appropriate guidelines for your case and write them down in a written operating agreement.

What should your operating agreement contain? In your operating agreement, you must address a number of problems, some of which will be dependent on your company’s specific circumstances and requirements. The following items are usually included in most operating agreements:

the LLC’s members’ proportional interests
the rights and duties of the members
the voting power of the members
how will profits and losses be distributed
the manner in which the LLC will be run
a set of guidelines for conducting meetings and taking votes, as well as
“Buy-sell” clauses define what occurs if a member wishes to sell his or her stake, dies, or becomes incapacitated.

While these things seem to be simple, they are packed with information. Make sure you complete out the details in the important sections below.

Ownership percentages An LLC’s owners often make financial contributions to the company in the form of cash, property, or services to get it off the ground. In exchange, each LLC member receives a portion of the LLC’s assets. Each member is often assigned a percentage of ownership according to his capital contribution, although LLCs are allowed to split ownership in any manner they see fit. Your operating agreement depends on these contributions and percentage interests.

Shares that are distributed Each LLC owner gets a part of the company’s earnings and losses, known as a “distributive share,” in addition to an ownership stake in return for his initial commitment. Typically, an operating agreement specifies that each owner’s distributive portion corresponds to his percentage of LLC ownership. Tony, for example, gets just 35% of the earnings and losses from his LLC since he owns only 35% of it. Najate, on the other hand, owns 65 percent of the LLC and is entitled to 65 percent of the earnings and losses. (If your LLC wishes to distribute distributive shares that aren’t proportional to the owners’ percentage interests in the company, you’ll need to follow specific allocations procedures.)

Profits and losses are distributed in different ways. Your operating agreement should address the following questions in addition to establishing each owner’s distributive share:

How much of the LLC’s assigned earnings (the members’ distributive shares) must be given to LLC members each year, if any at all?
Can members expect their LLC to pay them at least enough to offset the income taxes they’ll due on the LLC earnings they’ll get each year?
When will profit distributions be made?
Or are the owners entitled to a portion of the company’s earnings on a regular basis?

Because you and your co-owners may have varied financial requirements and marginal tax rates (tax brackets), you should pay special attention to how earnings and losses are allocated.

Right to vote While most LLC management decisions are made informally, there are occasions when a choice is so significant or contentious that it requires a formal vote. There are two methods to distribute voting power among LLC members: either each person’s voting power is proportional to her percentage ownership in the company, or each member is given one vote (known as “per capita” voting). The majority of LLCs distribute votes in accordance to the members’ ownership stakes. Regardless of the technique you choose, make sure your operating agreement states how much voting power each member has and if a majority of votes or a unanimous decision is needed to settle an issue.

Transitions in ownership Many new business owners fail to consider what would happen if one of the owners retires, dies, or sells his or her stake in the firm. These worries may not be on your mind right now, but small company entrepreneurs face similar circumstances all the time, and it pays to be prepared. A buyout plan – guidelines for what happens if one of the LLC’s members quits for whatever reason — should be included in the operating agreement. Plan for changes in LLC ownership with buy-sell provisions for additional information.

What is an operational agreement and how do you make one? Obviously, you’ll need more assistance than what’s provided in this article to draft your own operating agreement. There are many sources for blank or example LLC operating agreements, but you must ensure that your operating agreement is tailored to your company’s requirements as well as state regulations.

Although law libraries are a valuable source of state LLC legislation and technical information on drafting an operating agreement, the content is intended for attorneys, so you may find it more perplexing than helpful.

You may hire a business lawyer for help, and we suggest it for LLCs with more than five owners or for individuals who want the LLC to be managed by a specific manager or management group. Lawyers usually have a number of boilerplate agreements on available that may be tailored to your LLC’s needs.

If cost is a concern, software that assists you in forming your own LLC may be the best option. LLC Maker (from Nolo.com), for example, will utilize your input to create a customized operating agreement that fits the interests of you and your co-owners while still complying with state regulations.

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The “family LLC operating agreement template” is a simple and easy to use document that can be used as an operating agreement for your family business. Reference: family llc operating agreement template.

Frequently Asked Questions

Can I create my own operating agreement for my LLC?

A: Yes, you can create your own operating agreement for your LLC. You will need to consult with a legal professional to help ensure that the document is legally valid though as it must be evaluated by a lawyer before filing with any government agency.

What should be included in an LLC operating agreement?

A: An LLC operating agreement is the document that sets out the terms of operation for your limited liability company. It should include, among other things, information relating to your name and address; the names and addresses of members or managers in charge if you are a member-managed entity; how often meetings will be held; what happens when theres no meeting called (if it has an emergency procedure); procedures for authorizing transactions by written consent including whether specific people can authorize certain types of transactions without further approval from shareholders/owners in general.; formalities such as when shares are issued or transferred to new owners, who becomes president in case one person initially acts as both President and Secretary.