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Member-managed vs. manager-managed operating agreements
Let’s dive into the importance of mastering the operating agreement for those who are running a business as a limited liability company (LLC).
An operating agreement spells out the rights, duties and obligations of members and managers in addition to the set rules for running your company. This agreement should be established before business operations begin so that there is a meeting of the minds amongst everyone participating in the financial venture. This agreement will also alleviate any future disagreements that could lead to unwarranted lawsuits.
An LLC is one of the most sought-after asset protection vehicles because of the double asset protection that it provides to its members. However, the second best thing about operating your business as an LLC is the option for members to either run the company themselves or to appoint a manager, who may or may not be a member.
If the members decide to run the company themselves, the agreement that should be enacted is called a membership operating agreement. On the other hand, a management operating agreement should be in place if non-member managers run the business.
It’s best to decide from the very beginning whether you will be a member-managed or manager-managed company. While it is not a requirement in every state to have an operating agreement, the rules regarding your rights in the event of any type of legal action against your company are provided in your state’s statute based on the operating agreement.
Although there are pre-made templates on the market, you should always create an agreement that speaks specifically to your company. Include as many details as you need to give clarity to all members and managers.
Here is a breakdown of some of the main points your operating agreement should cover:
- Formation: The state in which your company organized, its purpose and other rules you have agreed apply to your company.
- Members: All initial members should be listed along with any membership interests that apply.
- Contributions: All initial capital contributions need to be listed and made a part of the agreement.
- Profit and Loss: Clearly state how profits and losses are handled amongst each member.
- Distributions: Detail the amounts and intervals of member distributions.
- Management: List each initial manager and their duties and obligations.
- Fiduciary Duty: Name the fiduciary duties of each member.
- Registered Agent: The names and addresses of registered agent(s) should be listed.
- Assets: Include all of the assets that belong to the company and any rules or directions that have been settled for them.
- Records and Accounting: How your company will handle this important documentation.
- Banking: Document how the members have decided to authorize one or more members or managers to oversee the financial activities of the company,
- Taxes: How the company is filing and/or paying taxes and the tax matters partner.
- Separate Entity: The limited liability should be clearly spelled out in this section.
- Meetings: Define any agreed upon meetings.
- Amendment of Agreement: Decide whether or not the agreement will be amendable and clearly state the intentions in this section.
- Conflict of Interest: If members are not allowed to involve themselves with another business that competes with yours.
- Deadlock: State the solutions to any potential disagreements between the members.
- Dissociation of a Member: The intentions for members to discontinue membership in any way.
- Dissolution: The reasons for dissolving the company.
- General Provisions: Anything that has been agreed upon by all parties regarding the company.
Once decided exactly how it will be run and managed, add the necessary verbiage to secure all parties involved in your company.
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