Starting a new business is an exciting venture, and setting up a well-defined LLC operating agreement plays a pivotal role in that journey. It acts as a guidebook that governs your LLC and sets out members’ rights, responsibilities, and the operational procedures of your business.
In this comprehensive guide, we’ll share some essential things to consider when writing down your own agreement. This will especially be helpful for budding freelance writers!
10 Important Things to Include in Your LLC Operating Agreement
Before you get started, generate your LLC’s operating agreement using a free online tool like Form Pros. With this template, our tips will be much easier to follow.
1. Identify Your Business
Your first step is to include the full legal name of your business entity as registered with the state. Also, ensure to mention its chief business address, including the city and state.
This initial identification step is not merely procedural. It serves a great purpose. By having the right information about your Legal Limited Liability Company (LLC) in your operating agreement, you present a professional image to banks, investors, or any important external parties.
2. Set Out Member Contributions
Clearly detail what each member of the LLC has contributed to the company. This could be cash or property, invaluable services, or even intangibles like industry contacts or proprietary tech.
While detailing these contributions, establish their respective value in terms of percentage ownership in the company. This promotes transparency and also plays a crucial role when distributing profits or managing losses, whether a member stays or decides to opt-out.
3. Specify Management Structure
Define how decision-making will occur in your company. Be clear about whether your LLC will be managed by its members or if you’ll designate a manager or team for this purpose.
Transparency in management structure goes a long way in preventing potential conflicts. Clarity on who has the authority to make day-to-day decisions and larger strategic choices can greatly enhance the functioning of your business while ensuring all members know their responsibilities.
4. Assign Roles and Responsibilities
After specifying your structure, you’ll need to assign clear roles and responsibilities for each member. This could include anything from HR decisions to procuring new clients.
It’s equally important that every member understands their responsibilities thoroughly. If there are any potential overlaps of duties or unclear areas in role assignment, address them quickly. Your forward thinking prevents confusion and ensures everyone is working toward your goals.
5. Dictate Profit and Loss Distribution
Explain how profits and losses will be allocated among members of the LLC. You might do this according to the percentage of membership interest held by an individual, but it’s not obligatory.
Loss distribution is one aspect that’s often overlooked but equally crucial. Make sure you explain whether losses will be divided among members in a similar manner as profits or if there’ll be a specific rule. Transparency in financial matters can help minimize future disputes among members.
6. Plan Fiduciary Duties and Decision-Making Processes
To maintain trust among all members, ensure that you include clear statements declaring fiduciary duties each member must fulfill, along with voting powers on major decisions.
In terms of decision-making, specify how decisions will be made within your LLC. Detail processes related to regular business decisions and exceptional or emergency situations. Clarity about who has a say in defining your business’s direction can help you avoid standstills.
7. Absence and Succession Planning
Contemplate what will happen if a member becomes incapacitated, retires, or passes away. Address these sensitive matters upfront to make sure you can continue after this happens.
Detail how a member’s interest in the company will be handled in such situations. Consider whether their shares will be sold back to the company, distributed among existing members, or passed onto their heirs. An agreed-upon plan can reduce tension during difficult times.
8. Provide Exit Strategy Procedures
Detail the circumstances under which a member might leave the LLC and how they would disengage from their role. This could happen voluntarily due to retirement or other reasons.
Include procedures for determining the value of the exiting member’s shares in the company. Indicate whether these shares would be absorbed by remaining members, sold to an outsider, or handled in any other specific way. Ensure that all procedures are democratic and agreed upon by all members.
9. Include Dispute Resolution Methods
Consider preventative measures to handle disagreements among members. This could include naming a neutral third-party mediator or opting for arbitration as an alternative to litigation.
Clarifying dispute resolution procedures in your agreement can be a significant factor in maintaining harmony. When expectations and methodologies are laid out clearly, conflicts can be addressed promptly and prevent escalating tension or damage to the business.
10. Make Provision for Future Changes
Your operating agreement should include an amendment process. As an entrepreneur, you must anticipate that changes in structure or membership may occur as your business grows.
By outlining procedures for managing changes upfront, you create a flexible framework that can evolve with your startup. Whether it’s adding new members, changing management structures, or amending provisions, an intelligible plan will ensure a smooth transition during expansion.
In Conclusion
You’re now armed with the knowledge to write a comprehensive LLC operating agreement! It’s your turn to unlock the true potential of your business by putting into practice what you’ve learned in this guide. Remember, a successful journey starts with a well-planned map!