What is an operating agreement for a limited liability company? An operating agreement defines the rights and obligations of the members, governors, and managers (or officers) in a limited liability company. It’s probably the most important document for your limited liability company. While the articles of organization supersede the operating agreement, the articles are a public document and usually contain little substance. The operating agreement, on the other hand, dictates pretty much every aspect of the LLC.

Management

The operating agreement usually dictates how the limited liability company is managed. An LLC is a very versatile type of business organization. It has three basic options for management: (1) member-managed; (2) board-managed; and (3) manager-managed. Depending on the wishes of the members, the operating agreement’s rules regarding management can range to very simple to very complex.

Buy-Sell Agreement

The operating agreement usually contains a buy-sell agreement. A buy-sell agreement defines the rights and obligations of the members in the event of death, disability, separation of employment, divorce, bankruptcy, and other triggering events. The buy-sell agreement is about assurances. It gives the members assurances they will do business with people of their choosing. It also gives assurances there will be a buyer in the event of death or disability. The operating agreement may include provisions funding the eventual sale, as well. This might be done with life insurance or permanent disability insurance.

Fiduciary Duties

The operating agreement usually defines the members’ rights and obligations to each other. By default, members may owe fiduciary duties to one another. The operating agreement can alter those rights and obligations.

Operations

The operating agreement usually defines the members’ rights and obligations with respect to the company’s operations. For example, the operating agreement can dictate under what circumstances the members may make a distribution, make a loan, or make a capital call.

If you need assistance with your limited liability company, please contact our Business Law Team. We’d be happy to help.

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