An operating agreement is created in the context of a limited liability company, and it is used to define, among other things, the ownership interests, division of profits and losses, terms of withdrawal of members, dissolution of the company, and so on. In contrast, a partnership agreement is created in the context of a partnership, such as a general partnership, limited partnership, or limited liability partnership. Thus, even if you have two business owners, an LLC entity shall require an operating agreement.
We are strong proponents of written agreements by and amongst partners and members of a business entity, and we strongly encourage the creation of this governing document at the beginning of the business relationship when, in reality, the relationship is the strongest and in the best place. As Laura aptly advises, “Plan for the worst when things are the best.”
Certain key provisions should be set forth in the operating agreement, such as:
- The name of the LLC
- The owners of the LLC
- The capital accounts of the members
- The distribution and allocation of profits and losses
- The management of the LLC for day-to-day affairs, including whether the LLC is member-managed or manager-managed
- Members’ voting rights
- Procedures for the withdrawal of a member
- Procedures for dissolution and termination of the LLC
- Terms for dispute resolution
- Confidentiality provisions concerning the LLC’s business and assets
In the absence of an operating agreement, the LLC will be governed by the state’s LLC laws. In New York, for example, the New York Limited Liability Company Law shall apply. Also, in the absence of specific terms from an operating agreement, then the LLC is bound by the minimum requirements set forth in the LLC law, and the laws will provide the laws necessary to establish whether the business can operate thereunder.
It is imperative that the operating agreement is prepared by an attorney. While there are plenty of resources online to create simple versions of these agreements, able counsel will provide specific guidance and considerations based on their knowledge and experience in preparing or reviewing other governance documents and, perhaps, in reviewing an agreement between partners or members that precipitates litigation.
Disclaimer: The information contained in this post is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. We invite you to contact us and welcome your calls and communications. Contacting us, however, does not create an attorney-client relationship.