how llc operating agreements work
an llc is a type of u s business entity that is easy to form and simple to manage and importantly limits the liability of owners since an llc is a hybrid of a partnership and corporation it provides the twin benefit of pass through taxation with limited liability 1to take full advantage of having an llc you should go one step further and write an operating agreement during the startup process many tend to overlook this crucial document since it is not a mandatory requirement in many states only a few states specify the need to register an operating agreement when creating an llc the operating agreement is thus a document that spells out the terms of a limited liability company llc according to the members it sets forth the path for the business to follow and brings in more clarity in operations and management a typical llc operating agreement is a 10 to 20 page contract document which sets up guidelines and rules for the llc in states such as california missouri and new york it is mandatory to include this document during the incorporation process 234 while most other states do not insist on including it it is always considered wise to draft an operating agreement as it protects the status of a company comes in handy in times of misunderstandings and helps in carrying out the business according to the rules set by the members businesses that do not sign an operating agreement fall under the default rules outlined by the states in such a case the rules imposed by the state will be very general in nature and may not be right for every business for example in the absence of an operating agreement some states may stipulate that all profits in an llc are shared equally by each partner regardless of each party s capital contribution an agreement can also protect partners from any personal liability if it appears they are operating as a sole proprietorship or a partnership an operating agreement once signed should be kept safely as an important record of the business benefits of an llc operating agreementeven if a business venture only has a single owner employee it can still be beneficial to codify the relationship with an llc operating agreement having an operating agreement establishes a legal boundary between the llc and the owner so that the owner is not held accountable for the llc s debts or liabilities otherwise creditors to the llc may pursue the owner s personal assets an operating agreement also allows the owner to codify the rules of succession for their business as well as governance procedures such as meetings and voting without an operating agreement ownership of the business is handled according to the state s default llc rules 