If you are interested in starting a small business or you own a business and want more protection in the event of disputes, seeking a formal agreement makes sense. There are four types of business structures in the U.S., including:
Sole proprietorship: In this structure, the business owner has total control over the company operations. According to the IRS, this is the most common form of business in the U.S. In a sole proprietorship, the business owner takes full responsibility for the business’ debts.
Partnership: When two or more people join together to run a business, a partnership is formed. Partners share in the profits and losses of the business, and they are personally liable for debt and lawsuits.
Limited Liability Company (LLC): This business structure can be managed by a single business owner or by partners. In this scenario, LLC members are protected from personal liability in the event of financial troubles.
Corporations: This complex business structure keeps liabilities completely separated between owners and the business, because the business is its own legal entity.
LLC business structures strike a balance between sole proprietorships and partnerships, which are at higher risk of personal liability, and corporations, which are much more complex than is often necessary for small business owners. If you are considering transition to an LLC identity, one of the most important documents you’ll need to create is your operating agreement.
What is the operating agreement for an LLC?
An operating agreement is a legally-binding document that outlines the structure, functionality, regulations, and provisions of an LLC. These documents are generally between five and twenty pages long and provide key details on the business’ internal affairs. The contents of the document are broken down into six articles (sections):
The first section of the operating agreement offers details on when the company was created, who the members are, and the structure of ownership between members,
2. Management and Voting
You’ll find details on the managing powers of members in this section. If the members decide that business decisions will be made through a voting process, this section of the document provides details on how the voting process works, and the way that votes are allocated between members.
3. Capital Contributions
This section provides documentation of which members have invested money in the LLC. It also details the ways that money can be raised by members.
Do members share in profits and losses equally, or is funding shared in another specific way between members? This section provides details on allocating money, property, and assets.
5. Membership Changes
This article discusses the process for adding and removing members from the LLC, and what happens when members decide to buy out their shares. It also provides a framework for what to do if a member leaves, goes bankrupt, or dies.
In the event that a company must be dissolved, this section offers guidance on how to make it happen.
Why is an operating agreement important?
An operating agreement is part of what makes an LLC, an LLC. In order to protect the company’s limited liability status, an operating agreement must be in place. Companies without an operating agreement in place are subject to states laws in the case of legal action. This can leave members subject to personal liability.
Furthermore, an operating agreement provides a written proclamation for the company’s functionality that everyone can refer to and understand. In the case of disputes or unexpected emergencies such as the loss of a member, imminent bankruptcy, or being sued, business members know what steps to take.
What is the difference between a partnership agreement and an operating agreement?
A partnership agreement is used for partnership business identities. These documents will not be recognized in support of a Limited Liability Company if the business comes under fire. An operating agreement is unique to LLCs and is legally binding for its members.
Is an operating agreement legally binding?
Yes. In Florida, an operating agreement is not required by law, but it is strongly recommended to have one on file. As a business owner, unexpected events can strike at any time. Having a professionally drafted operating agreement helps you maintain your limited liability in those cases.
At Lubliner Law, our business attorneys are here to assist with the creation, management, and use of your LLC operating agreement. We have years of experience and work closely as an advocate for our clients when they need us most.
How can I make an operating agreement? Can I make my own?
It is possible to create your own operating agreement. However, it is not recommended. Following generic templates can be a useful place to start, but if you’re not careful, you could leave your LLC open to litigation in ways you had not anticipate. The last moment you want to find out about vulnerabilities that your business is exposed to, is when you face litigation.
It is best practice to hire a business attorney to create formal operating agreement documents for LLCs. Our dedicated team at Lubliner Law is here to help. We provide sound legal advice and vigorously represent our client’s best interests. We would love to be of service.
Whether you are just starting an LLC or looking to improve your existing operating agreement, call us at 561-207-2018 for a free consultation. We have serviced a variety of business clients including those in e-commerce, equestrian, retail, hospitality, food and beverage, entertainment, and professional sports.