04 Jun LLC Operating Agreement-Please Read!
Limited liability companies (LLCs) provide liability protection for all owners (members), regardless of their managerial functions; and multi-member LLCs qualify for favorable partnership-tax rules.
This benefit can be lost or curtailed if you do not have an operating agreement document in your company records.
LLCs are created under and governed by state LLC statutes–no federal statute. Some states require a formal agreement to be part of your initial set of documents; other, such as Pennsylvania, do NOT require such.
For tax purposes the Federal check-the-box classification governs–as an LLC can file its returns as a C or S Corporation by election;otherwise a single-member LLC is taxes as a sole proprietorship, while a multi-member is taxed as a partnership.
A written operating agreement is akin to a partnership agreement providing operational rules for running the business, and can override or alter default rules in your state’s LLC act. For example, you own an equal interest in an LLC with 2 other members, and do not have an operating agreement in Pennsylvania, the state’s default laws may allow the other members to:
- welcome new members without your consent
- incur or sell assets without your consent
- add, remove, or revise the terms of the agreement
- dissolve the LLC without your consent
Therefore, you need an operating agreement to perfect your interest in this entity; and, if should be drafted and signed by all members as soon as possible after forming the entity.
In addition, the LLC can jeopardize its limited liability protection benefit, if NOT operating in a business-like manner. Having the operating agreement lends further credibility to your LLCs business purpose and separate existence.
In conclusion, the operating agreement forces you/and or your members to put in writing the elements discussed in this article, and will potentially save you from a myriad of problems.