Many entrepreneurs choose to structure their business as a limited liability company (LLC). Entrepreneurs often favor this structure because it involves beneficial components of both the corporation and partnership structures.
If you are starting an LLC, you probably already know there are numerous steps to take in the formation stage of your business. One of these steps is drafting the LLC operating agreement, which details the members’ rights and responsibilities for the business, as well as how the business will operate. When signed, this document binds the members to its terms.
Must all LLCs have an operating agreement?
LLCs are not required to file an operating agreement with Ohio’s Secretary of State. However, it is often prudent to create one anyway. An operating agreement can help protect members from personal liability to the business. It can also help document verbal agreements between members, creating a reference in case there are future misunderstandings.
What should be included in an operating agreement?
An LLC operating agreement governs how a business operates. Because each business has unique needs, the content of operating agreements can vary. However, there are several questions that most operating agreements should address, including:
- What percentage of ownership does each member have?
- How will members divide profits and losses?
- What powers and responsibilities do members have?
- What are the procedures for transferring interest?
- How will officers be appointed?
- What are the procedures for meetings?
- Who has voting rights for major events?
- What are the procedures for dissolution?
An LLC operating agreement can help protect you personally, while also helping your business operate smoothly. For these reasons and others, the creation of a thorough LLC operating agreement can be a beneficial step in the formation of your business.