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LLC Operating Agreements for Beginners

An Overview of the Importance of LLC Operating Agreements


LLC Operating Agreement

An LLC operating agreement is the document or contract that serves as the rules by which a business is run. It must be signed and approved by the LLC members and it is always advisable to consult an attorney.

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All limited liability companies, or LLCs, are supposed to be governed by a contract that the investors sign amongst themselves. This contract is known as an LLC operating agreement. It is virtually identically to the limited partnership agreement that governs limited partnerships.

Common Provisions in LLC Operating Agreements

An LLC operating agreement contains important provisions such as:

  • Ownership Information: The percentage ownership of each member (in an LLC, owners are called members not stockholders) in the company.
  • Profit and Loss Allocation: Unlike a traditional corporation, an LLC operating agreement doesn’t have to require that profits and losses are divided by ownership. Special arrangements can be made, such as letting one investor bear the burden of all the loses or having another get paid a performance incentive bonus based upon the company’s results.
  • Dividend Requirements: An LLC operating agreement can call for regular, required dividend distributions, no dividends at all, or dividends paid at the discretion of the managers if it is a manager run limited liability company.
  • Required Meetings: How often the managers or members meet can be spelled out in the LLC operating agreement.
  • Restrictions on the Business: The members can set restrictions on a business in the LLC operating agreement including limiting the industries in which a company can do business, requiring a certain dollar amount of working capital to reduce risk, forbidding specific types of investments such as common stock, or even requiring that the company never sell certain types of products or service. Anything that is legal and can be put in a contract is fair game for an LLC operating agreement.
  • Dissolution Dates and Plans: An LLC operating agreement can include scheduled dissolution dates for investment projects that are supposed to last a predetermined length of time. It can also include required build-out dates or targets for sales, profits, or other financial ratios.

Other LLC Operating Agreement Notes

If you are thinking about investing in a limited liability company or you want to start one to hold some of your investments such as rental properties or a small business, make sure to meet with a well-respected, qualified attorney who can help you customize your LLC operating agreement based on your needs.

More Information about Limited Liability Companies or LLCs

For more information, read our New Investor's Guide to Limited Liability Companies or LLCs.

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