Key Provisions for a Valid LLC Operating Agreement

Creating a successful LLC is a great accomplishment for any business owner to meet. In order to reach that goal, a strong operating agreement is needed. Different LLCs will need different operating agreements. In particular, specific terms, ownership structure, state of incorporation, and business structure are different for every business. Therefore, ensure that your operating agreement includes the following provisions displayed below:

1. Distributions

Profits and losses of an LLC are part of the everyday life of a typical business. An operating agreement is given the task of defining how the profits will be divided between the members, as well as the losses.
Therefore, the distribution provision of an operating agreement should explicitly state each member’s ownership stake in the LLC. Accordingly, the provision should display the ownership breakdown of the company. Ordinarily, an operating agreement will have a table-like format that will display the member’s name, their capital contribution to the business, and their ownership stake in the company.
We took the liberty to provide an example of a capital contribution and percentage interest table that you may typically find in your operating agreement:

Member Capital Contribution  % Ownership Stake
Bob $400,000 40%
Rachel $300,000  30%
Dylan $300,000  30%

 

2. Roles and Responsibilities of each Member

All members of the LLC will be responsible for particular areas of the business. The operating agreement should clearly state these responsibilities. This will ensure that you have accounted for all areas of the business by delineating certain members to different parts of the business.

This section could also include other various powers and duties of particular members. Specifically, the operating agreement can explicitly state that a majority of members is needed to make any and all decisions.

3. Classes

While all members own parts of the business, some businesses have different classes of ownership. The particular class your shares of ownership are in, will determine your voting rights and financial entitlement. While not all LLCs need to have classes, if you do decide to include this form of structure in your LLC, ensure that it is placed in your operating agreement.

4. Books and Record-keeping

Failing to keep thorough books and record-keeping could be detrimental to the survival of your LLC. In some cases, failure to conduct record-keeping could lead to revocation of your business. Thus, ensure that the operating agreement mentions the process for record-keeping and who will be responsible for it.

5. Dissolution

One of the most important provisions in an operating agreement is a provision on dissolution. If a piece of property was sold belonging to the business, a member leaves, a member dies, or even if all members decide they want to end the business, the company will be dissolved pursuant to a dissolution provision in the operating agreement. Thus, your operating agreement must have a provision on the different potential routes a business could pursue in executing a dissolution.

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These are just a few of the key provisions. You may also consider clauses that cover buyouts, internal disputes and more. Drafting an operating agreement is extremely important for the success of an LLC. Schedule an attorney consultation with one of ​JUSTLAW’s many experienced attorneys​ to learn more about how we can help!

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