An LLC operating agreement is a legal document that outlines the ownership structure, responsibilities, and operating procedures of the LLC.
LLC operating agreement is not required by law in most states still it is highly recommended. As it can help establish clear lines of authority. It will resolve disputes, and protect the personal assets of LLC owners in the event of a lawsuit. It also serves as a reference for tax, legal, and banking purposes.
States that do require an LLC operating agreement are California, Delaware, Maine, Missouri, and New York.
Creating an LLC operating agreement typically involves:
a) Determining the ownership structure,
b) Allocating profits and losses,
c) Defining decision-making processes,
d) Establishing dispute resolution procedures.
The document can be created by the LLC owners themselves or by hiring a lawyer, you can also choose a registered agent.
Businesses could use templates, such as FormPros’ form generator, to create an LLC operating agreement. Just make sure that the template you’re using is legally binding.
In this article, we’ll take an in-depth look at the LLC operating costs in 2023. Also, different expenses that business owners can expect to incur when operating an LLC.
What Is An LLC Operating Agreement?
In general, an LLC operating agreement is a vital document that helps establish the internal operations and governance of an LLC. It can help define the roles, responsibilities, and ownership of the members or managers.
Establish the rules for making decisions and distributing profits and losses. An operating agreement also provides a framework for resolving disputes. Helps protect the personal assets of the LLC members. Serves as a reference for tax, legal, and banking purposes.
Having an LLC operating agreement in place can provide clarity and stability to the business operations. It can help avoid misunderstandings or disputes among the members in the future. It is especially important for multi-member LLCs, where multiple people are involved in the management and ownership of the company.
An LLC operating agreement is an important document for any LLC, regardless of the state requirements. It can provide a solid foundation for the operations and success of the company. It can help avoid potential disputes and legal issues in the future.
Benefit of an Operating Agreement For Your Small Business
An LLC operating agreement is a valuable document for small businesses, providing many benefits to the owners and managers.
Here are five key ways that an operating agreement can help your business:
1. Strengthens LLC status:
Having an operating agreement can help reinforce the limited liability status of your LLC. Separating your personal assets from the LLC operating costs and liabilities, and reducing the risk of personal exposure.
2. Reduces misunderstandings:
A written operating agreement can help eliminate confusion and misunderstandings between members. By clearly outlining the ownership percentages, roles, responsibilities, and profit distributions for each member.
3. Outlines key business procedures:
The operating agreement provides a comprehensive framework for the business. Covering voting rights, conflict resolution, meetings, communication, bookkeeping, tax preferences, and financial distributions, among other key procedures.
4. Builds credibility:
Having an operating agreement can demonstrate your commitment to running a legitimate and organized business. This increases the credibility of your company in the eyes of banks, investors, and other stakeholders.
5. Protects from default state laws:
The operating agreement allows you to bypass default state laws and dictate your own terms and conditions. Which might not align with the state-stipulated laws. This can help protect your interests and those of your members in case of any conflicts.
How Much Does An Operating Agreement Cost?
The cost of an LLC operating agreement varies depending on a number of factors, including the complexity of the agreement, the experience and hourly rate of the lawyer you hire, and any additional services that you may require, such as filing or notarization.
Forming An LLC
The first step in creating an LLC is to form the company. This involves registering your business with the state in which you plan to operate. The cost of forming and operating an LLC varies by state, but you can expect to pay anywhere from $50 to $500 in fees. Some states also require a yearly fee to maintain your LLC’s good standing.
State Filing Fees
In order to form an LLC, you must file articles of organization with the state in which you plan to do business. The cost of filing these articles varies by state, but you can expect to pay anywhere from $50 to $500. In addition to the initial filing fee, some states also require a yearly fee to maintain your LLC’s good standing. These fees are typically between $50 and $200 per year, depending on the state. It should be noted that the cost of forming an LLC is also influenced by other factors. Such as the number of members in the LLC, the business structure of the LLC, and any additional requirements imposed by the state.
Registered Agent Fees
One of the requirements for forming an LLC is to have a registered agent. This is an individual or company responsible for receiving legal documents and notices on behalf of your LLC. So, if you choose a registered agent service, you can expect to pay anywhere from $50 to $200 per year for this service. The cost of a registered agent can vary depending on the level of service provided, with some agents offering more comprehensive services, such as mail forwarding, for an additional fee.
It’s recommended to choose a registered agent and customized operating agreement to ensure that your business interests and assets are fully protected and to avoid any potential legal implications down the road.
Which States Need LLC Operating Agreements?
Many states do not require an LLC operating agreement to be filed or submitted to the state. The following five states do officially require an LLC to have an operating agreement:
- California
- Delaware
- Maine
- Missouri
- New York
It’s important to note that even if your state does not require an operating agreement, it’s still highly recommended to have one in place. An operating agreement can help you establish clear rules and guidelines for the operation of your LLC, and can provide protection for your personal assets in case of business liabilities.
How Operating Agreement Is Filed?
An LLC operating agreement is an internal document and is not typically filed with the state. However, there are some states that require a copy of the operating agreement to be kept with the company’s records.
To file an operating agreement, you will need to follow these steps:
1. Prepare the operating agreement: You can either draft the agreement yourself using a template or hire an attorney to draft it for you. Ensure that the agreement is comprehensive and covers all the important aspects of your business, such as ownership, management, voting rights, etc.
2. Get signatures from all members: Once the agreement is ready, have all the members sign it, either physically or digitally, to indicate their agreement to the terms of the agreement.
3. Keep a copy with your company records: It’s important to keep a copy of the operating agreement with your company records, such as your articles of organization, tax returns, etc. This will be useful in case of any legal disputes in the future.
4. Update the agreement as needed: An operating agreement is not a static document and should be reviewed and updated as needed. To reflect changes in your business, such as the addition or removal of members, changes in management, etc.
Can You Make Changes To An Operating Agreement?
Yes, you can make changes to an LLC operating agreement. You can amend an operating agreement as it is a flexible document. Likewise, it’s important to keep the operating agreement up-to-date to ensure that it accurately reflects the current structure and operations of the business.
To make changes to an operating agreement, you’ll need to follow these steps:
1. Review the existing agreement: Before making any changes, it’s important to review the current operating agreement. After reviewing determine the changes.
2. Prepare the amendment: Draft the amendment to the operating agreement and mention changes.
3. Get approval from all members: In an LLC, all members must agree to any changes to the operating agreement. All members should review and sign it after the amendment to indicate their agreement to the changes.
4. Update the agreement: After all members have signed the amendment, update the operating agreement to reflect the changes and keep a copy with your company records.
Seek the advice of an attorney. When you are not sure about making changes to an operating agreement. Especially if the changes are significant or have legal implications.
Is an Operating Agreement Identical to Articles of Organization?
No, an operating agreement and articles of organization are not the same documents. The articles of organization, are the formal documents. Filed with the state government to create an LLC. They typically include basic information about the LLC. Such as its name, address, and the names of its members or managers.
An operating agreement, on the other hand, is an internal document that outlines the ownership, and management. It also shows the operating procedures of an LLC. It’s a crucial document for the members of an LLC. It sets out the rules and responsibilities for running the business.
Final Words
Having an operating agreement in place can solidify the limited liability status of your LLC. It protects the personal assets of the members or managers. This is because an operating agreement creates a clear distinction between the business and its owners. It also helps establish the LLC as a separate legal entity.
An operating agreement also outlines the ownership and management structure of the LLC. Including the rights and responsibilities of each member or manager. This helps to reduce the chances of misunderstandings between members. Knowing your LLC operating costs ensures to protect the interests and assets of all.
