What Is an LLC Operating Agreement?

An LLC Operating Agreement is a legal document that outlines the ownership structure, management responsibilities, and operating procedures of a limited liability company (LLC). Unlike bylaws, which are typically associated with corporations, an LLC Operating Agreement is specific to LLCs and serves as the governing document for the company's internal affairs.

Difference between Bylaws and LLC Operating Agreements:

• Corporations primarily use bylaws to establish the rules and procedures for governance, while LLC Operating Agreements are explicitly tailored to LLCs.

• Bylaws typically cover topics such as shareholder rights, board composition, and meeting protocols, whereas LLC Operating Agreements focus on ownership interests, management structure, and member responsibilities within the LLC.

Elements Covered in an LLC Operating Agreement:

• Ownership Structure: Specifies members' ownership interests, including the percentage of ownership and any capital contributions.

• Management Structure: Defines how the LLC will be managed by its members (member-managed) or designated managers (manager-managed).

• Member Rights and Responsibilities: Outlines the rights and obligations of members, including voting rights, decision-making authority, and financial responsibilities.

• Distribution of Profits and Losses: Determines how profits and losses will be allocated among members, typically based on their ownership interests.

• Decision-Making Procedures: Establishes the process for making important business decisions, including voting thresholds and procedures for amending the Operating Agreement.

• Dissolution and Buyout Provisions: Sets procedures for dissolving the LLC or buying out a member's interest in the event of death, disability, or withdrawal.

• Dispute Resolution Mechanisms: Specifies how disputes among members will be resolved, whether through mediation, arbitration, or litigation.

LLC Operating Agreement serves as a tool for organizing and governing the internal affairs of a limited liability company. While the elements outlined in this document are essential for establishing a framework for operations and member relationships, it's important to recognize that each LLC is unique, and its Operating Agreement should also reflect that.