As a business owner, you may have heard the term “legal operating agreement” before. But what exactly is it and why is it important?
A legal operating agreement is a written agreement between the members of a limited liability company (LLC) that outlines how the business will be managed and operated. This agreement is not required by law, but it is highly recommended for any LLC to have one in place.
The operating agreement typically includes provisions for:
1. Management structure: This outlines how the LLC will be managed and who will be responsible for making decisions.
2. Member contributions: This outlines how much money or assets each member will contribute to the LLC, as well as their percentage of ownership.
3. Profit and loss distribution: This outlines how the profits and losses of the LLC will be distributed among the members.
4. Voting rights: This outlines how decisions will be made within the LLC and how many votes each member is entitled to.
5. Dissolution and termination: This outlines the process for dissolving the LLC and how any remaining assets will be distributed.
So, why is a legal operating agreement important?
Firstly, it helps to establish clear expectations and responsibilities among the members of the LLC. This can help prevent disagreements and conflicts down the road.
Secondly, it can protect the members` personal assets in the event of a lawsuit or debt. Without a legal operating agreement, the LLC may be treated as a partnership, which means the members could be held personally liable for any legal or financial obligations.
Finally, it can help attract investors and secure financing. Having a legal operating agreement in place shows potential investors and lenders that the LLC is organized and has a clear plan for growth and success.
In conclusion, a legal operating agreement is an important document for any LLC to have in place. It ensures clear expectations and responsibilities among members, protects personal assets, and can help attract investment and financing. If you do not have one in place yet, it is highly recommended to consult with a lawyer to draft one for your LLC.