When you start your LLC with Collective, you'll create an operating agreement, which is a legal document that outlines how your business will operate. This includes details such as how decisions will be made, how profits and losses will be shared and how conflicts will be resolved.
An operating agreement is not filed with the government like your articles of organization. However, it is an essential tool to help guide your business affairs/defining your entity type and governance requirements.
Why you may need an operating agreement
An operating agreement is a document that outlines the rules for how an LLC will operate, especially with regards to the relationships between its members. While it is most important for LLCs with two or more members, even single-member LLCs can benefit from having one to understand how to manage their corporate affairs to maintain a compliant LLC.
Here are some reasons why an operating agreement can be useful:
It helps protect your limited liability status by demonstrating that your LLC is a legitimate business entity separate from you personally, which is especially important for single-member LLCs.
Lenders and other businesses may require to see your operating agreement before working with you or providing loans.
You can tailor your operating agreement to override some of your state's default LLC rules, giving you more control over how your business is run.
Your operating agreement can also serve as a business succession plan by naming someone to take over the management of the LLC in the event that you become incapacitated or die.
An LLC operating agreement can be a helpful reference guide that outlines the rules for how your business should be run, providing clarity and guidance for you and any future members.
What goes into an operating agreement
An LLC Operating Agreement should be tailored to your business's specific needs, and there are no legal requirements regarding what you must include. However, there are some key points worth including, such as:
Contributions and distributions
The operating agreement can be written in any way that you wish. For a single-member LLC, the agreement is usually shorter and simpler than one for a multi-member LLC, which requires more attention to members' rights and responsibilities. Finally, remember to sign the operating agreement to make it legally binding and keep it in a safe and secure place with your other LLC records. You should also routinely review and ensure it's updated to reflect your current business practices.
As part of the new entity setup process with Collective, you’ll be able to create and sign an Operating Agreement once your LLC has been formed. It’s important that you review and ensure you understand the provisions in the agreement before formally adopting it. You’re also welcome to draft your own operating agreement. Simply forward a signed copy to [email protected] and we can add it to your Collective dashboard. We also advise consulting a business attorney to help ensure your Operating Agreement meets your business needs.
Disclaimer: The information contained in this document is provided for informational purposes only and should not be construed as financial or tax advice. It is not intended to be a substitute for obtaining accounting or other financial advice from an appropriate financial adviser or for the purpose of avoiding U.S. Federal, state or local tax payments and penalties.