OPERATING AGREEMENTS

What Is an Operating Agreement?

An operating agreement is a legally binding document that outlines the management structure and operating procedures of a limited liability company (LLC). While not always legally required, an operating agreement is essential for protecting the interests of the LLC’s members and ensuring that the business operates smoothly. The agreement details each member's financial and managerial rights and responsibilities, including profit sharing, voting power, and procedures for resolving disputes.

At Isaboke Law, we help LLCs draft, review, and revise operating agreements to ensure their business is legally protected and runs efficiently. Whether you're forming a new LLC or updating an existing agreement, we provide customized legal solutions that fit your business needs.

Why Is an Operating Agreement Important?

Operating agreements are crucial for ensuring that an LLC operates in accordance with the interests of its members and complies with relevant legal requirements. Key benefits include:

  • Clarifying Roles and Responsibilities: Operating agreements specify the roles, responsibilities, and voting rights of each member, preventing disputes over decision-making and management.

  • Legal Protection: A well-drafted operating agreement limits the personal liability of LLC members by clearly separating personal and business assets. This legal distinction is crucial for maintaining the LLC’s status as a separate entity.

  • Ownership and Profit Distribution: Operating agreements outline the ownership percentage of each member and how profits and losses will be distributed, ensuring clarity and fairness in financial matters.

  • Dispute Resolution: The agreement establishes protocols for resolving disputes among members, reducing the likelihood of prolonged conflicts that could harm the business.

  • Flexibility: Operating agreements provide flexibility in how the LLC is managed. Members can customize the agreement to fit their unique business needs, including how decisions are made, how profits are allocated, and how new members are admitted.

Key Components of an Operating Agreement

  1. Ownership and Membership Interests The operating agreement should clearly define the ownership interests of each member, including the percentage of ownership and how membership interests can be transferred or sold. This section also addresses how new members can be admitted to the LLC.

  2. Management Structure Operating agreements specify whether the LLC will be member-managed or manager-managed. In a member-managed LLC, all members participate in day-to-day decision-making. In a manager-managed LLC, certain members or outside managers are designated to run the business.

  3. Voting Rights and Decision-Making Procedures The agreement should outline the voting rights of each member and how major decisions will be made. This may include the percentage of votes required to approve important business matters, such as amending the agreement, admitting new members, or dissolving the LLC.

  4. Profit and Loss Distribution The operating agreement specifies how profits and losses will be distributed among members. This may be based on ownership percentage or another agreed-upon formula.

  5. Capital Contributions This section outlines the initial capital contributions made by each member and any additional contributions that may be required in the future. It may also address how contributions will affect ownership percentages and voting rights.

  6. Membership Changes The agreement should specify the procedures for adding or removing members, including buyout provisions, transfer restrictions, and how the LLC will handle the death or departure of a member.

  7. Dissolution and Winding Up Operating agreements should include provisions for dissolving the LLC and distributing its assets if the business is no longer viable. This section outlines how the business will be wound up and how remaining assets will be distributed among members.

  8. Dispute Resolution The operating agreement should establish a process for resolving disputes between members, such as mediation, arbitration, or litigation. Clear dispute resolution procedures help prevent conflicts from escalating and disrupting the business.

Legal Considerations for Operating Agreements

  1. State Law Compliance While not always legally required, operating agreements must comply with state laws governing LLCs. Each state has its own rules regarding LLC formation and operation, and our legal team ensures that your agreement meets all relevant legal requirements.

  2. Tax Implications Operating agreements can impact how an LLC is taxed, especially in multi-member LLCs where members can choose to be taxed as a partnership or corporation. We work with you to ensure that your agreement reflects the best tax structure for your business.

  3. Limited Liability Protection One of the main purposes of an LLC is to provide limited liability protection to its members. To maintain this protection, the operating agreement must clearly separate personal and business assets, and the LLC must follow the procedures outlined in the agreement.

How We Assist with Operating Agreements

At Isaboke Law, we provide comprehensive legal services to help LLCs draft and update operating agreements. Our experienced attorneys work with you to ensure that your agreement reflects your business goals and complies with applicable laws.

  • Drafting Customized Agreements: We work with LLC members to draft operating agreements tailored to their specific business needs and state regulations.

  • Reviewing and Updating Agreements: For established LLCs, we review existing operating agreements to ensure that they are legally compliant and reflect the current needs of the business.

  • Amending Operating Agreements: If your LLC’s ownership structure or operational goals have changed, we help amend the agreement to ensure that it remains up-to-date and legally enforceable.

Case Study: Operating Agreement for a Family-Owned LLC

A family-owned LLC approached us to help draft an operating agreement that would address the unique needs of their multi-generational business. Our legal team worked with the family to create an agreement that clarified roles, established decision-making procedures, and provided a plan for succession. This agreement helped the family preserve their business and avoid future conflicts.

Why Choose Isaboke Law for Operating Agreements?

  • Experienced in LLC Formation: Our attorneys have extensive experience helping LLCs of all sizes draft, review, and update operating agreements.

  • Tailored Legal Solutions: We provide customized legal solutions that reflect your specific business needs and protect your interests.

  • Ongoing Legal Support: We offer ongoing legal support to help your LLC remain compliant and up-to-date as your business grows and evolves.

If your LLC needs assistance drafting, reviewing, or updating its operating agreement, contact Isaboke Law today. Our team of experienced attorneys is ready to help you create a legally sound operating agreement that supports your business’s success.