What is an Operating Agreement?

If you want more personal protection and less formalities for your business, consider forming an LLC (limited liability company). Here's what you need to know about operating agreements for LLCs:

What is an Operating Agreement?

An operating agreement is a vital internal contract between the members of the LLC. It describes the operating rules of the LLC and outlines financial and functional decisions, rules, and provisions that govern the business's daily operations. Once members sign it, it becomes a binding contract.

It also includes the course of action if a conflict arises, or a member needs to leave the business (by choice or for other reasons). The agreement can include member details, such as their duties and contributions to the agreement.

Why do you need an operating agreement?

  • Protect your limited liability status:  It helps maintain the LLC's separate legal status, protecting members from personal liability.
  • Clarify agreements: The agreement sets written rules for meetings, decision-making, and other operations, reducing conflicts that may appear from verbal agreements, and ensuring smoother business operations.
  • Strengthen your agreement legally:  An Operating Agreement defines who owns the LLC, their roles, and how profits are distributed. It prevents disputes and aligns member intentions.

What's included in an operating agreement?

The Operating Agreement typically covers the following points:

  • Ownership percentages of members
  • Voting rights among members
  • Duties of the members and managers
  • Profit and loss distribution
  • Meeting procedures and obligations
  • Buyout and buy-sell rules in the case of several events

Is an Operating Agreement required?

The requirement of an Operating Agreement varies by state. If you're unsure if your business requires an Operating Agreement, we suggest consulting with a legal professional who is knowledgeable about business laws in different states. 

Please note that legal laws and regulations are subject to frequent changes. While we aim to provide helpful information, it's important to understand that this page serves only for informational purposes and does not provide legal or tax advice.

More questions? Getting in touch with us is easy, whether you prefer sending an email to contact@tailorbrands.com, giving us a call at +1-888-209-2092, or simply clicking the Help button located in the bottom right-hand corner of our website.

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