When we’re working with people setting up a new LLC, a limited liability company here in Georgia, one of the questions we sometimes get is this, “What is an operating agreement?” Or, sometimes the question is, “What does it do?”
An operating agreement for an LLC is the LLC’s equivalent of by-laws for a corporation. It sets forth information about how the company will be managed and operated, and how long it will last (whether for perpetuity or for a certain term). The operating agreement for an LLC will often identify the ownership, the breakdown of percentage ownership, or membership unit ownership by the members, and it will also explain how profits or losses will be distributed among the members.
The operating agreement will address how the LLC is managed. Will it be managed by a manager, by a managing member, or by all of the members? A decision must be made, and that is documented in the Operating Agreement. And it will further explain as well the role of the members, and the role of any managers, as well as list what type of decisions are left to the vote of the members. Often times, the Operating Agreement will identify how the LLC can go out of business, what steps must be taken to decide to dissolve the business and wind it down, or what will happen in a specific point in the future if the LLC is only set up to operate for a certain number of years.
In some operating agreements they may go into decisions and plans for what happens if a member dies, or becomes disabled and can no longer actively participate in managing the company. It may also go into what will happen if a member wants out of the business or if other members want another member out – situations where there is a business divorce. Typically, for the death, disability, or a business divorce of members, we will put those plans in a more comprehensive contract between the members, called a member’s agreement, as opposed to in the operating agreement itself.
The bottom line is that the operating agreement essentially outlines who the players are in the LLC and how the LLC will be managed, just like the by-laws do for a corporation.If you’re looking at setting up an LLC and we might be able to be of help to you, or if you’ve got questions relating to how your LLC is operating and might need legal help with respect to that, I invite you to give us a call at The Beck Law Firm, LLC to see if we can be of help.