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Operating Agreement – Is it Necessary?

An Operating Agreement is a document that accompanies an LLC, ensuring the LLC is operating correctly and protects the personal liability of the company.  While every state does not require an Operating Agreement, it is best to have one.

It is also recommended that an attorney draft the document.  Some states will provide a standard Operating Agreement and the Articles of Organization for the LLC.  Note it is just that, a standard document.  At this point, it probably doesn’t match the actual operations of your company.  Having an attorney draft your company’s operating agreement will establish the rules and structures unique to your company.  It will define, in writing, how the LLC is to operate.  If the state or court of law questions the operations of an LLC, the operating agreement is readily available.

If you choose to take on this task yourself, be sure to address these essential elements:

Ownership – This addresses how the company’s profits, losses, and assets are divided between the members.

Members’ Rights and Responsibilities – This section should cover the members’ rights and responsibilities.  It should also address how much input each member has in the company decisions and how to settle disputes between the members.

Joining or Leaving LLC – Check with the Secretary of State’s office before drafting this portion.  The Secretary of State may have its own rules associated with entering or leaving an LLC, all of which should be incorporated into the Operating Agreement.  

 Dissolution – The Operating Agreement should address how the company will formally close with the state.  This section also explains how the members will divide the assets after the company debt is paid.

Severability provision – This is a standard legal boilerplate. It states that if a condition of the operating agreement proves to be contrary to state or federal law, all other aspects that are not contrary to the law should remain in effect. By including a severability provision, the LLC ensures any tiny oversights do not invalidate the entire agreement.