Five Essential Provisions to Include in an LLC Operating Agreement
Forming a Limited Liability Company (LLC) is a popular choice for many entrepreneurs thanks to its flexibility. In order to keep your LLC running smoothly, it is important to have a comprehensive operating agreement. An LLC operating agreement governs the relationship between the company and its owners, known as members. Here are five essential provisions you should include in your LLC operating agreement:
Management
Your LLC operating agreement should clearly define who has the authority to manage the business and the scope of their decision-making power.
2. Capital Contributions
Your agreement should specify the initial capital contributions required from each member and detail the circumstances under which additional contributions might be necessary.
3. Tax Status
An LLC can elect to be taxed either as a partnership, where income is passed through to the members’ personal taxes, or as a corporation. Your operating agreement should establish how the LLC will be taxed.
4. Distributions
Your operating agreement should spell out the method for distributing and dividing profits—whether based on each member's capital contribution, split evenly, or using another formula.
5. Dissolution
While starting a business is exciting, planning for its potential end is equally important. The dissolution provision in your operating agreement should lay out the steps for dissolving the LLC. This includes specifying conditions for dissolution, distribution of remaining assets, and the responsibilities of each member during the winding-up process.
An LLC operating agreement serves as the foundation of your business. Incorporating these five essential provisions will help protect your business and its members from potential disputes and uncertainties. Taking the time to craft a comprehensive operating agreement isn’t just a legal formality; it’s a strategic move that positions your LLC for long-term success.
