Operating agreements are an essential part of every limited liability company (LLC) formation. They outline the rules and regulations that govern the company and provide a roadmap for decision-making, dispute resolution and other important matters. If you`re thinking of forming an LLC or are already a member of one, it`s important to understand what provisions are typically included in an operating agreement. In this article, we’ll discuss the most common provisions that you might find in an operating agreement.
1. Membership and ownership – An operating agreement should clearly state who the members of the LLC are, their ownership interests, and the rights and privileges that accompany their interests. This should include details such as how membership interests can be transferred or sold and how voting power is distributed among members.
2. Management and decision-making – The operating agreement should specify the procedures for managing the company and making important decisions. This includes how the LLC will be managed – whether by managers or members – and how voting will be carried out in meetings.
3. Profit and loss allocation – The agreement should include details on how profits and losses of the LLC will be distributed among the members. This is important because it will determine how each member shares in the financial success or failure of the company.
4. Capital contributions – The operating agreement should layout the requirements for member contributions, including how much each member will contribute, when those contributions will be made, and the consequences of a member’s failure to make their required contribution.
5. Dissolution and termination – In the event that the LLC needs to be dissolved or terminated, the operating agreement should outline the procedures for doing so. This includes how the assets and liabilities of the company will be distributed and how any remaining profits will be divided among members.
6. Non-compete and confidentiality – Some operating agreements include a non-compete clause which prohibits members from engaging in business that competes with the LLC. Additionally, many operating agreements may contain a confidentiality agreement that requires members to keep sensitive business information confidential.
In conclusion, every operating agreement will vary depending on the needs of the LLC and the wishes of its members. However, these six provisions are common in most operating agreements. Understanding these provisions will help you make informed decisions when forming or joining an LLC, and it will help ensure that your LLC runs smoothly and successfully.