Do I need an Operating Agreement?

By Alex Smith

An operating agreement (or, “bylaws”, for a corporation, and a “partnership agreement” for a partnership) establishes the rights of LLC members and the rules that will govern the operation of the business entity. Although not required by law, an operating agreement can serve as a guiding document to help businesses maintain stability, establish consistency, and navigate complex issues that may arise. An operating agreement can accomplish this through a number of typical provisions. A few of these key provisions are listed below, although there are many more terms, rights, and conditions that can be included in an operating agreement.

Management of the Entity

An operating agreement will generally describe how the company is managed. Specifically, the agreement will specify whether the entity is “member managed” (meaning managed by the owners themselves), or “manager managed” (meaning that the entity is managed by individuals who may or may not be owners of the entity). This distinction is important as it sets forth who will be making the critical decisions affecting the company’s operations. An operating agreement will also set forth the percentage of membership interest needed for the company to take certain actions. These provisions should be specifically tailored to the company with attention to its operational goals and the composition of its membership and management.

Admission of New Members

The question of whether new members may be admitted, and how, can also be addressed in an operating agreement. This decision may vary depending on whether a company wishes to remain closely held or is anticipating rapid growth in part due to the addition of new members.

Meetings

An operating agreement sets forth when regular meetings are held, as well as the circumstances under which members or managers may call a meeting, and the methods by which members or managers may vote at such meetings. Meetings serve as the primary venue where key decisions of the company are made. Accordingly, it is important that the manner in which meetings will be conducted is thoroughly described in the operating agreement.

Restrictions on Transfer

Chances are, you’d like some say in who your business partners will be in the long term. An operating agreement can help you have a say by putting restrictions on whether an ownership interest can be transferred, and the approvals that are needed to allow any such transfer. Having such a provision can help ensure that your company remains in good hands.

Dissolution

There may come a time when you want to wind down, sell, or otherwise liquidate your business. Setting forth the terms under which such a dissolution will occur is important for long-term planning and business strategy. Addressing dissolution and liquidation in an operating agreement helps provide certainty and predictability to any wind down or sale.

If you would like an operating agreement drafted for your company, please contact me at (612) 361-6394, alex@smithpllcmn.com, or through our web portal.