Understanding why the LLC needs to have an operating agreement in place starts with having a grasp on how corporations are governed. For the most part the affairs of a corporation are largely governed according to the state statutes. The contrary is true for LLC's. The state statutes for the LLC provide default provisions that will be exercised in the absence of a corresponding provision in the LLC’s operating agreement which means that they only come into play if the terms are not outlined in the operating agreement. While the LLC is registered at the state level the internal affairs of the company are governed by the operating agreement. This is why most state require an LLC to adopt an operating agreement.
The fundamental elements of an operating agreement should include provisions that outline the following:
- Equity structure ; contributions, allocations of profits, losses and distributions.
- Management, voting, limitation on liability and indemnification.
- Record keeping and books.
- Anti-dilution protections, transfer restriction, buyouts, dissolution or liquidation.
- Confidentiality agreements.
- Provisions governing law and dispute resolution.
In closing the operating agreement is a vital instrument in outlining the governance and operating conditions of an LLC. The more due diligence that is done when crafting an operating agreement; the less will default to the state statues. If you need help or need revision with the operating agreement provided by us please contact us so that we can assist in adding or removing any provisions that may cause foreseeable acrimony between the members in the future.