For new business owners, writing an operating agreement for their new limited liability corporation is a good way to outline all the key functions of the business. While an operating agreement is optional in many states, it is highly recommended. A well written agreement can create a formal foundation to grow the new business. Having established, written rules for distribution of profit and day to day operations can avoid confusion. Startup owners can find many free templates online for the most basic outline of operating agreements. Here are the basic elements to write a free operating agreement for an LLC business startup.
The Purpose Of The Business
The first step to write an operating agreement for an LLC startup is to state the purpose of the business. The purpose explains the product or service the LLC will provide in order to make money. This section should be broad enough to describe most of the operations of the business without being so broad that it doesn’t accurately describe the business. If the business expands or changes it’s operational scope in the future, this aspect of the operating agreement must be changed to reflect the new purpose. A business purpose serves as the foundation of the entire operating agreement and must be chosen carefully.
Admission And Dismissal Of New Members
Another important part of writing an operating agreement is determining how many new members will be accepted into the LLC. For example, a new member may be required to purchase an interest in the LLC before being admitted. Admitting a new member might also require the approval of a percentage of the current members. This section would also outline how a member might leave voluntarily, and what action would make an LLC member eligible for forceful dismissal. Even single member LLC owners should make this a part of their operating agreement as having a formal process outlined simplifies the growth of the company.
Dividing The LLC Profits
A key aspect of an LLC’s operating agreement is how members of that LLC will share the profits of the company. Similarly to a joint stock company, an LLC can issue shares to each member of the company. What percentage of the company’s profit is owed for every share owned should be outlined in this section. Consider using stockcharts as a tool to streamline this process. Additionally, the operating agreement should include whether the profit is distributed on a regular basis or withdrawn at will by shareholding members. The business owner may also choose to keep a minimum amount of money for the LLC itself. New business owners must clearly outline how their startup will distribute any profit to avoid legal issues.
How The LLC Will Be Managed
Above all else, writing an operating agreement for a business startup must include how the business will be managed. The LLC has to decide if it will be managed by the members directly, or by managers. If it will be administered by managers, new business owners will have to decide how those managers will be appointed. After this, the operating agreement must detail how long they will serve, what they will be paid, and any limits on their authority. A startup writing an operating agreement must outline how that new business will be managed and by whom.
Requirements For Changing Company Bylaws
In order to effectively react to new situations, a new LLC operating agreement must contain rules for changing the businesses’ bylaws. This portion of the document should detail under what conditions members should meet to discuss any potential changes. It must also establish how many members have to be present in these meetings for any changes to be made. This is also true for bylaws of nonprofit organizations. As different members may not have equal stakes in the LLC, this portion has to define how many votes a member has in changing the bylaws. New business owners should carefully consider this section of the operating agreement to ensure that the new business can effectively change over time.
For new startup owners, drafting an LLC operating agreement is the first step towards creating a business that lasts. The operating agreement should start by stating the purpose of the business and how it plans to make money. There should be clauses in it that deal with how members of the LLC are admitted and dismissed. Careful consideration should be applied to how the business plans to split the money it earns. The operating agreement has to deal with who will manage the business and how they will be chosen. Finally, the agreement has to contain rules for members to change the elements of the agreement itself. By understanding these principles new business owners can write a free operating agreement for their LLC business startup.