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Adopting an Operating Agreement

Published July 16, 2010

The purpose of an operating agreement is to establish the rights, powers, duties, liabilities, and obligations of the members between themselves and with respect to the LLC. An operating agreement aids your LLC by guarding your limited liability status, heading off financial or management misunderstandings, and making sure your business is governed by the rules you establish.

All of the elements in an operating agreement should be carefully considered and then customized to fit the needs of all involved parties. This is especially important when an LLC consists of two or more members.

Generally, an operating agreement should address the following issues:

  • The purpose of the LLC, including its scope of activity
  • The members’ percentage interest in the LLC
  • The members’ rights and responsibilities
  • Voting power of each member 
  • Day-to-day management of the LLC
  • How conflicts of interest will be resolved
  • How minor and major decisions will be made
  • The distribution of profits and allocation of losses
  • Guidelines for admission and withdrawal of members
  • Buyout provisions

Each of these elements will depend on the scope and nature of your business. When drafting an LLC operating agreement, it is best to consult a corporate attorney who can help you adopt operating rules that will allow your company to reach its full potential.

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