What is an LLC Operating Agreement and Why Do You Need It

people sitting in an office building
people sitting in an office building

A Limited Liability Company (LLC) is the preferred business structure choice for many business owners. LLC is the go-to structure because of its low state requirements and recordkeeping formalities. However, every business owner that opts for an LLC must make sure they have a solid LLC operating agreement as it controls how the business is structured and operated.

What is An LLC Operating Agreement?

LLC Agreement or LLC Operating Agreement lays down the rules and structure for the business and helps resolve any issues that may arise during business operations. Although many states already have default rules that address many difficulties encountered by businesses, an LLC operating agreement has the power to override them all.

This agreement is similar to the articles of incorporation and allows you to write down working and financial relations between owners, members, and managers of the business. It also determines how decisions are made, who has the voting rights, ownership stakes, and many other structural features of the business.

In the absence of this agreement, the business must be run according to the default rules of your state.

people in a board room

Do You Need an LLC Agreement?

So, does your LLC require an LLC agreement? Here are some reasons you should consider it:

Security of Personal Assets

With an LLC agreement, your personal assets and separated and protected from your business assets. This is the most important reason your LLC may need an operating agreement, even if your state doesn’t require it. This agreement shows that your business is a legit company and keeps your personal affairs separate from your business affairs.

Don’t Have to Follow the States Default Rules

Without an LLC operating agreement, your state’s default rules kick in. These default rules are made keeping in mind what people would commonly prefer; however, sometimes they can give a business unwanted results.

Banks and Investors May Require It

If you need a loan or have potential investors, they may need to see the agreement as proof that you own the company.

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