A question commonly asked is, “what is an operating agreement for an LLC?” There are all kinds of answers and definitions. Some answers are overly complex and make you sorry that you asked.
The term “operating agreement” in very simple terms is a contract. It’s an agreement, nearly always in writing, between the members of the LLC. In many cases, the contract is also between the LLC as an entity and the members.
An operating agreement sets out the expectations of the people that are involved in the ownership and management of an LLC. As a result, the terms of the contract establish
The Right Size
As we have suggested, operating agreements can be pretty simplistic or downright complicated. You need an operating agreement that fits you and your LLC. Have you ever tried to wear someone else’s shoes that weren’t your size? Maybe as a small child, you stepped into dad’s boots and tried to walk. It didn’t work because the boots were nearly up to your knees and you fell.
An operating agreement can be too big for you or too little. It’s best to have an operating agreement that suits the size and nature of your LLC. An operating agreement that is too basic and doesn’t have the options you need makes it difficult. Like the coffee analogy, if someone wants the fancy
The opposite can be true if the operating agreement is too convoluted and filled with procedures, agreements, and language that doesn’t fit the circumstances for your LLC. These oversized, extra-large operating agreements are like my car. It has probably 1,000 features that aren’t ever used. Some features are unnecessary; like navigation as my cell phone works really well to tell me where to go. Others may be convenient features if there was time to figure out how to use them. Since the car manual is not one manual, but five thick manuals with numerous choices, it’s easier not to bother trying to read it.
An operating agreement that has too much can create frustration and disappointment when one member of the LLC reads and begins to follow the agreement. The others aren’t expecting anyone to really use those clauses. Again when expectations aren’t met all the way around, people become frustrated. When enough frustration takes place, people often decide it’s no longer worth it. The operating agreement that was supposed to help the LLC now becomes an anchor weighing down the process.
What Should Be In My Operating Agreement?
Excellent question! You aren’t going to like the answer. How does this sound to you? First, we’ll spell out in detail the criteria you need in a spouse. Then we’ll tell what you need in your LLC’s operating agreement. Don’t worry, we know what you’re looking for in a mate! We have the perfect person in mind for you!!!
The special things that make one person right for you are the very attributes that make the potential mate a bad choice for someone else. Are there some general expectations that fit most circumstances (such as not having a third eye in the forehead)? Sure there are some general considerations for most LLCs and the operating agreements. But, just like your spouse, the importance of the attributes and the priority to be given to them really varies with each LLC and the members/managers. If marrying someone 18 inches shorter or taller doesn’t make much difference to you, then
You have to consider what you want in your operating agreement, then include the relevant material in the written pages. Just like most of us want a spouse with eyes, teeth, hair, etc., your operating agreement should probably cover who can or can’t be a member, how you get to be a member, voting rights, the rules for meetings and discussions, etc. We have heard of couples who have rules of engagement for marital fighting. There are certain things that both agree are not allowed. Like you can say anything about me, but you better not say one word about “mama!”
Some things that deserve attention are how profits are to be divided and when they will be paid, how losses will be apportioned, the type of tax status the LLC will elect, the level of liability of members to each other, the level of liability for the debts of the company, and how hard you want it to be to change the relationship as time passes. Did we mention an operating agreement is analogous to a spouse? Who is going to pay the bills? How do you decide on what things money is spent? How do you decide those tie votes when one says pizza and the other wants hot dogs?
In some locales, marriage counseling has become a requirement for getting a marriage license. Couples receive some training and advice on how to approach issues in cohabitation and coping skills. If you haven’t prepared an operating agreement before, then the professional advice of an LLC attorney may save you from making mistakes that cost you a fortune later on down the road.
A gentleman comes to mind that bought a house for the family without consulting his wife. The couple’s divorce had nothing to do with the house, but everything to do with how life decisions were going to be made. Having no marriage rule book and the husband flatly determined to continue in his unilateral decision-making role, the union split up.
Your LLC must have the ability to be flexible to an extent and possess the ability to accommodate
How Can We Help?
We can play nearly any role in your LLC operating agreement from complete preparation to a one-time review of the one you already have. Contact us to arrange a consultation and let us know how we can provide assistance. Simple, convenient, and affordable, we like helping Oklahoma folks with their LLCs and businesses!