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Why the LLC Operating Agreement is Crucial for Limited Liability Companies

Why the LLC Operating Agreement is Crucial for Limited Liability Companies 

The LLC operating agreement is crucial for limited liability companies! Many people think that filing limited liability company (“LLC”) incorporation documents with the State (ie: Florida department of State: Division of Corporations) and obtaining a federal tax identification number are the only steps to opening a new business That assumption is extremely far from reality. While most individuals can file the LLC Articles of incorporation themselves, very few can prepare the necessary operating documents every LLC needs to protect the business owner(s) and business assets from unforeseen future threats.

One such vital operating document is called the LLC operating agreement. The operating agreement is a document that is customized to each particular business. The operating agreement is a signed document made between the company and the members and managers of the LLC. While shareholders of a corporation must look to the common laws to determine their rights and obligations, members or shareholders of a limited liability company can customize these rights and obligations to their business purpose and preferences. This corporate document remains private and describes, in detail, how the LLC will function on a day-to-day basis and over time. It is essentially the rules of the company.

Not having a customized limited liability company operating agreement puts your business at a serious disadvantage. The operating agreement can provide rules for partnership profit and loss allocation as well as protect against inadvertent S election termination (if drafted properly) in the event the limited liability company elects to be taxed as an S corporation. The operating agreement can authorize redemption of membership interests in the event of a future potential threat (personal litigation, divorce, etc.). Provisions for redemption of membership interests upon death may be added as well. The agreement can further provide how the company will terminate and liquidate its assets upon dissolution. There are many other protective provisions that may be added and/or customized to each particular business.

Keep in mind that the operating agreement may be changed and/or restated from time to time to ensure that it coincides with the current legal and taxation law. This allows the limited liability company to function with great flexibility and versatility.

As a cautionary final note, if you simply downloaded your operating agreement from a website online, it may be missing many of the customizations and provisions that are critical to your company’s operation. Also, if you don’t employ the knowledge of a business attorney, you may be executing the wrong documents or executing them incorrectly. Business law is a very complex field of law and hiring a business attorney is essential.

Contact Capital Planning Law, PLLC for your complimentary consultation to discuss your estate planning, business law, probate, guardianship and/or real estate needs.