An Operating Agreement is a document that governs the internal operations of the business in a way that suits the specific needs of the LLC owners. It covers a range of topics such as: What are the ownership percentages of the owners, how to add or remove members/managers, how are the profits divided, etc.
It is also not necessarily required by most states however if you do not have one, you will have to abide by the State's default rules for LLCs. A good operating agreement addresses these questions and many others for your company specific needs. Here are some more information about the document.
A lot of people go into business with their friends or family, and the best way to avoid any fights or drama will be to keep things regarding the LLC in black and white. The operating agreement will detail the following and more: Identifying the initial Owners/Members of the LLC & their ownership percentages, Explain how to add/remove members or managers, How you will run the day to day business, and policies for voting rules / procedures regarding the LLC.
Spelling issues like this out at the beginning spares you from a lot of “but I thought” and “but you said” and “what I meant was…”
One perk of having an LLC instead of a corporation is the flexibility it gives you. With an operating agreement, you can use that flexibility to decide how you want profit and ownership structured. Say one partner puts in only 30% of the initial investment and the other puts in 70%. Maybe the majority owner is willing to take only 50% of the LLC profits in exchange for having a greater say in management or having to do less work in the daily operation of the company.
This is just one of many examples of the way you can customize it. There are a lot of ways to tailor the Operating Agreement for your company specific needs.
Just because your state may not need or require an operating agreement for your LLC, other institutions will. One example is how many Banks will want to see the LLC's Operating Agreement to open a business bank account.
Even if you are a solo founder, it would still be worthwhile to setup your Operating Agreement for your LLC. It can hold you accountable and can also help establish legitimacy to the courts that your business is a separate entity from yourself vs being a sole proprietor.
Also consider that an operating agreement is something that you might want to show to potential investors and business partners. It puts a plan in place for succession if you die or become incapacitated. Another benefit for creating an operating agreement is that it also helps you to focus and think about your plan for the company and how you’ll deal with various scenarios should they arise. It gets you in the mindset to run a business.
Our pricing package includes a free Operating Agreement template that you can use for your LLC. The best part is you don't need to pay a company that will just put your company name in the template and charge you $50+. It is just one of the many additional services included in our package!