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|There are several reasons why an entrepreneur would opt to form an LLC or Limited Liability Company. It provides nice features for start up or smaller businesses like sole proprietorships and partnerships. Most of the time a Limited Liability Company serves to give the business a structure that will maximize profits and reduce operating costs. Another reason to form an LLC is for the protection it gives to business owners.
One thing to be particular about if you are planning to form an LLC is the Limited Liability Company operating agreement. Although not all state require a company operating agreement it would still be prudent to have one drafted. Running a sole proprietorship does not mean that you do not need a company operating agreement. You still do.
How is a Limited Liability Company operating agreement significant?
路 It protects your limited liability status for legal purposes. If you are the sole owner of the LLC , without the company operating agreement the courts will view your business as a sole proprietorship. The agreement is needed to give credibility to the LLC.
路 For LLCs with multiple members, the agreement will provide a structure for management and profit distribution. Without it, any misunderstandings and conflicts between members regarding finances and management will be difficult to resolve.
路 The company operating agreement will also serve to replace the default LLC rules set by some states. Without the company operating agreement your LLC will have to follow the basic rules set by the state such as the equal distribution of profits and losses regardless of a member鈥檚 stake in the company.
Instead of letting the default rules set by the state govern your LLC, the company operating agreement will define a more suited structure and set of rules.
The company operating agreement needs to address several things. These are some of the things that should be defined in the company operating agreement:
路 Each member鈥檚 responsibilities and rights.
路 Management of the LLC
路 Rules regarding regular meetings and votes
路 Buy-sell provisions in case of members wanting to sell their interest in the company, dying or being generally disabled.
路 Each member鈥檚 stake in the company. Normally, each member receives a stake in the company proportional to the amount of resources they have put in the establishment of the company. The company operating agreement will allow members to divide ownership of the company any way they like regardless of contributions to the capital. The distribution of profits will usually be proportional to a member鈥檚 stake in the company but the agreement will also allow profit distribution that is not proportional to a member鈥檚 ownership percentage.
路 The voting power of each member must also be clearly defined. More often than not a member鈥檚 voting power is proportional to their stake in the company.
You have several options regarding the creation of a company operating agreement. Business lawyers can be consulted. The process can also be done online or with the use of LLC formation packages.
The so called company operating agreement is a structure of a specific company that will set the provisions that are suited in the default rules of a state. For more info about company operating agreement visit us at
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