Essential to every limited liability company is the operating agreement. While the articles of formation or organization establish the LLC within the state of formation, the operating agreement spells out the specifics of the LLC such as the members, their contributions, percentage owned and items of this nature. The operating agreement also specifies rules and guidelines of the LLC. Most formation services will provide a generic operating agreement or you can purchase a generic agreement at any office supply store. It is recommended though, that you have a professional review the agreement and possibly have them draft one for you.

The operating agreement can be any number of pages but should be all-inclusive containing details about how the LLC is operated and each members responsibilities. I cannot stress enough the importance of the operating agreement, as a properly drafted agreement can prevent headaches down the line. I have seen a number of limited liability companies start with all the members in complete agreement only to end up out of business because of disagreements.

Your typical operating agreement will contain the following:

• Name of company, formation date and state of formation.
• Registered Agent and principal  office address.
• Nature of the business.
• Members names and addresses, initial capital contributions and percentage owned.
• Title to assets.
• Guidelines regarding additional contributions of capital.
• Guidelines regarding capital accounts.
• Allocation of profits and losses.
• Guidelines regarding distributions to members.
• Administration of company business and the addition/withdrawal of members.
• Various other provisions.

Another area the operating agreement provides is the day-to-day management of the company. Some LLC’s have managers run the daily operations making management decisions while others have the members managing the company. This, of course, needs to be spelled out in the operating agreement to avoid confusion. Other important matters spelled out in the operating agreement include the scheduling of annual meetings, quorum requirements, powers and limits of managers, procedures for amending the operating agreement, record keeping requirements and transfer of ownership interests.

It is crucial for LLC members to spend considerable time when drafting the operating agreement and to seek professional help if needed. The operating can make or break your business so spend the time at formation and avoid problems down the line.