Creating an operating agreement is a crucial step when you set up your LLC with Collective. This document isn’t just formal paperwork; it’s a practical guide that clearly outlines how your business will operate, covering everything from decision-making processes to profit sharing and resolving conflicts.
What is an Operating Agreement?
An operating agreement is a legal document that details the rules and procedures for running your LLC. It includes how decisions will be made, how profits and losses will be distributed, and how any disputes among members will be resolved. Unlike your Articles of Organization, this agreement isn't filed with the government but acts as a private contract between you and any other members of your LLC.
Why It’s Important
Even though it's not legally required everywhere, here are a few reasons why having an operating agreement is beneficial:
Clarifies Legal Status: It reinforces your LLC’s status as a separate legal entity, which is crucial for protecting your personal liability, especially for single-member LLCs.
Customization: It allows you to establish your own rules for the business, which can supersede state default rules that might not be to your benefit.
Financial and Legal Relationships: Banks, lenders, and other professional services might ask to see your operating agreement before doing business with you.
Future Planning: It can outline what happens to the business if you are no longer able to manage it, due to incapacity or death.
Key Elements to Include in Your Operating Agreement
While there’s no one-size-fits-all content for an operating agreement, here are some essential topics most businesses will cover:
Ownership: Details on the percentages of ownership each member holds.
Management: Who manages the LLC and how are decisions made.
Contributions and Distributions: Rules about initial contributions and how profits (and losses) are split.
New Members: Procedures for adding new members.
General Provisions: Any other legal stipulations or operational details pertinent to your specific business.
Creating Your Operating Agreement with Collective
Once your LLC is set up, you'll have the opportunity to draft and sign your Operating Agreement as part of your new entity setup process with Collective. It’s crucial to take your time to understand and agree to the terms before signing. While we provide the tools to create this agreement, you’re also free to draft your own. Just send a signed copy to [email protected], and we’ll upload it to your dashboard.
We recommend consulting with a business attorney to ensure your Operating Agreement fits your specific needs and fully protects your interests.
Remember
Keep your Operating Agreement in a safe place with your other important business documents. Regularly review and update it as your business grows and changes to ensure it always reflects your current practices and policies.
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.