If you’re starting a business, you’ve probably heard of an LLC, or “limited liability company”. And if you’ve decided to form an LLC, you may also have heard that you need an “Operating Agreement” or “LLC Agreement” (they mean the same thing).
But what is an Operating Agreement, and do you really need one for your LLC? Read on, we've got answers for you:
There are really just two basic legal documents for most LLCs:
The Articles of Organization (sometimes called a “Certificate of Formation” or a “charter”), is the short document that is filed with the state and officially creates the LLC.
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The Operating Agreement, which is basically a contract between the owners of the LLC. They don’t get filed with the state, and not all LLCs have Operating Agreements (although they probably should - more on that later)Pro Tip: LLCs are one of the two most common types of legal entities for businesses. The other is the corporation, and corporations have a completely different set of legal documents - usually Articles of Incorporation, Bylaws, and maybe shareholders’ agreements. Unless you’re forming a corporation, don’t worry about those for now. We’ll cover them in another Starter Law 101 post soon, and link to it here.
What goes in an Operating Agreement?
Here’s the thing: You can put pretty much anything you want in an Operating Agreement. It’s a contract, so you could say “everyone at the company has to wear jean shorts on Fridays” (please, don’t do this).
But there are three things that definitely should be in any LLC’s Operating Agreement, no matter how small or new the business:
Who owns the company. This should be a no-brainer, but you need to say somewhere - in writing - who owns how much of the company.
How the company is managed. Someone has to be responsible for making decisions - in LLCs these people are usually called “managers”.
What happens to the money. The Operating Agreement should say how profits are split up among owners - pretty important, right??
Do I need an Operating Agreement?
Yes. In addition to covering the details of ownership, management, and finances, an Operating Agreement can also help you keep one of the main benefits of having an LLC at all - limited liability.
That’s right, in some cases if you don't have an Operating Agreement, your personal assets could be at risk. Check out this post to learn more about the importance of limited liability for your new business.
What if I’m the only owner of the LLC? Do I still need one?
Yes. You should still have an Operating Agreement even if you are the only owner of the LLC. Sure, there’s no question about who owns what, or how profits are distributed. But an Operating Agreement helps ensure you keep your very important limited liability protections.
Another good reason: an LLC without an Operating Agreement is governed by the state’s default LLC rules - and those aren’t always what you want. Put an Operating Agreement in place for your single-member LLC and you’ll know exactly what you’re getting.
Where do I get an Operating Agreement?
There are a few places you could get an Operating Agreement:
From a lawyer. This is a good idea if you have a complicated ownership structure (lots of owners, some with different classes of equity, maybe some other LLCs or corporations are going to own some of the LLC. On the downside, it’s expensive. Like $1000 and up, depending on the lawyer and the complexity of the document
Copy-pasted from some random internet site. Don’t do this. You’re seriously better off with nothing.
From a reputable internet site. Yes, like us - Startomatic. While we’re not your lawyers, we are lawyers - lawyers who have a ton of experience creating Operating Agreements. You just answer a couple of questions, and Startomatic automagically (see what we did there?) creates a custom, best practices Operating Agreement for your new LLC. Startomatic costs just $199, and you get lots more than just the Operating Agreement.
Did we mention you can try Startomatic out for free for a week? Don’t wait, you can see what Startomatic offers right here.
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