What is an Operating Agreement?

If you are considering creating an LLC, you may have chosen to do so due to its structure. An LLC offers individuals similar properties and protections of a more formal business structure, such as a corporation, but allows personal protection for your assets. This protection is vital to those wishing to start a business as they can rest easy understanding that their home, their savings accounts, or other assets are not at risk when operating their business.

According to the Small Business Association, an Operating Agreement is “a key document used by LLCs because it outlines the business’ financial and functional decisions, including rules, regulations, and provisions.”

This document allows business owners the ability to lay out exactly how they would like their business to run internally and provides a legal document that governs those expectations. All parties must sign the document and are legally bound to abide by the rules once signatures are complete.

Important Aspects of An Operating Agreement

Each operating agreement will vary, depending on the goals of the business and what the owner chooses to include. Typically each operating agreement discusses the place of business, the statement of purpose, the management structure (more below), and the intended duration of operations. 

An essential piece of information to include in an operating agreement is to stipulate that the business is a separate entity and not tied to your personal assets. This further protects you from liabilities should your business ever be challenged in court.

Tax Preferences – LLCs can operate as exempt from a business tax, and most choose the LLC structure for this reason. This preference allows for income to be taxed at a personal level. The owner can outline this preference and any future plans to change to an S Corp or a C Corp and what that change would entail for its employees.

Management Structure

Structure of Management – An operating agreement can outlay whether the business follows a manager-managed or member-managed format.

Some LLCs elect to follow a manager-managed LLC, which essentially means that a small group of people is selected to manage the business to help the business run efficiently. Most more significant decisions can still remain open to a vote by the entire team, which can be stipulated in an operating agreement.

Another management structure for an LLC is a member-managed LLC, which puts all members in the business’s driver’s seat of management decisions. This option may not be appealing for larger teams, as all decisions, from large to small, must be agreed upon, which can slow down productivity.

Other Key Aspects of an Operating Agreement

An operating agreement typically includes additional essential factors: the member information section and operating procedures.

Once the management structure is defined, it’s important for all members to understand their roles and responsibilities within that structure. Information about members, such as their names, specific roles within the business, and their contributions to the formation of the LLC, whether financial or otherwise, can be found in most member information sections.

Operating procedures are another essential section of the operating agreement. This section typically outlines how the members will vote on important decisions that affect the business, how members are added to the group, the procedures surrounding that, why and when meetings will be held, and more. Information regarding how employees will transition to other roles or leave the company may be outlined, what happens in the event of the LLC dissolving, and other essential aspects of business operations may be discussed in this section.

Are LLCs Required to Form an Operating Agreement?

Several states require an LLC to form an operating agreement, but Colorado isn’t one of them. However, this doesn’t mean you should skip this step, as it can be vital to your business’s success.

Operating agreements can be invaluable if you ever need to provide legal proof that your business is a separate entity, further protecting yourself and your personal assets.

Another role an operating agreement can play is if there are disagreements between members, and you need to refer to the legal document that they signed stating what perspective should be taken on a given conflict.

Do I Need a Lawyer?

You may choose to independently formulate your LLC and relative legal documents, which can work for some people. What an experienced business lawyer can provide, however, is reassurance that you are following the proper steps to achieve the goals you have for your business and personal life. If you omit information or word it incorrectly, your personal assets may be on the line, or worse yet, your business could not thrive or even fail.

Legal professionals provide invaluable insight on business and legal matters so you can rest assured that your vision is not only supported but protected. Whether you have questions regarding what documents to file, how to formulate your business dream, how to create an effective operating agreement, or general inquiries, you can rely on your dedicated professional advocate as your lawyer to ensure you are doing all you can to achieve your goals.

Contact our office today at 303-557-2011 to discuss your specific questions and allow us to advocate for your dreams as you intend them to be. We offer free initial consultations to provide a clear strategy for you and your business needs. We look forward to serving you.