Why an Operating Agreement Is an Absolute Necessity When Starting a Business

If you own a limited liability company in or around Los Angeles, you’re likely somewhat familiar with an important document – the operating agreement for your business. If you are looking to form an LLC, this is a must-read article.

An operating agreement is a type of business contract containing provisions that govern the operation of an LLC. Think of it as the LLC-equivalent to by-laws for a corporation.

What Should Be Included in an Operating Agreement?

An OA should include a detailed recitation of the terms and conditions agreed to by the owners of the LLC, including contingencies that may arise in order to protect the LLC owners.

It should describe the specific protocols and policies both for day-to-day operations of the business and any unique circumstances. For example, the agreement should contain provisions governing what happens if a member decides to depart from the LLC. It should also address what to do if an owner passes away or gets divorced from their spouse. The agreement should also explain member duties and responsibilities for the daily operations of the business.

In California, the statutory authority governing the formation of LLC’s do not require an operating agreement (though, it is worth noting that Corporations Code § 17701.02(s) defines the term “operating agreement”).

Despite not being a legal obligation, having one for an LLC is strongly recommended since it is a document that can help protect you, and your business. If you form an LLC without an official operating agreement, you will be at the mercy of the state’s default provisions concerning the operation of a business, which may not be what you want. For example, some states require that profits from a business be divided equally between members. If you and your business partners have a different arrangement for the division of profits, but lack an operating agreement, you are exposing yourself to serious risk if a conflict were to occur down the road with your colleagues.

Provisions You Should Include in an Operating Agreement

The great thing about having an OA is that you can individualize them to fit the needs of your business. Nevertheless, there are certain provisions you should make an effort to include in your agreement, including:

• Definitions of key terms used throughout the agreement;

• Official name of the limited liability company;

• The formation date of the LLC and the general purpose for which the LLC was formed.

• The length of time in which the LLC plans to be in operation. In most instances, the length is “perpetual” unless a specific number of years is designated.

• The address of the principal office, the name of the Registered Agent (to whom legal documents are sent), and the address of the Registered Agent.

• Contributions of each member and the nature of their contribution (e.g., contributions in the form of cash, real property, intellectual property).

• Liability of Members Statement that the debts, obligations, and other liabilities belong to the company, not to the members.

Speak to an Attorney For Assistance in Properly Preparing and Filing an Operating Agreement

Though it is possible to prepare an LLC operating agreement yourself, it would be in your best interest to take the time to speak with an experienced business contract lawyer in Los Angeles. Having legal counsel will help ensure that your agreement contains the necessary provisions and does not leave any critical issues or stipulations out.