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The importance of a quality LLC operating agreement

On Behalf of | Dec 5, 2023 | Business Transactions And Litigation |

Running a business in California isn’t easy by any measure. Part of that difficulty can certainly be the complexity of the thick volume of legal code every business is expected to adhere to in the state. This can become even more tricky when the business is a limited liability company. One thing you may wonder about is the exact purpose of an LLC operating agreement.

Components of an LLC operating agreement

An LLC operating agreement is a business legal document that must be created to set up a limited liability company. An LLC operating agreement should include the following:

  • percentage of ownership by each member
  • plan for corporate governance
  • outline of the corporate officer’s compensation plan and powers
  • a non-compete clause
  • outline of who can be allowed to check accounting information
  • outline of how disputes will be arbitrated
  • outline of the process for how members can leave the LLC
  • explanation of fiduciary duties
  • plan for dealing with taxes and tax issues
  • explanation for how and when the LLC can be dissolved
  • succession plan

Benefits of an LLC agreement

While this may seem like a lot of work, being this thorough with your LLC operating agreement will have plenty of benefits in regards to protecting your company and its members going forward from different issues, especially when it comes to business law. Even if a single person will handle the LLC, this will still likely be the case. The agreement will help set the legal limits between the LLC and its owner or owners. This will shield the owner from issues such as the debts and liabilities accrued by the LLC.

Outlining further rules for the process of things, such as members leaving the LLC and how the LLC could be dissolved, will help prevent confusion and the need for legal intervention if such problems arise. Being specific with things like corporate governance rules can allow you to avoid using the default rules set in place by your state.

An LLC operating agreement should be as specific and detailed as possible. This will allow you to exert more control over the operation of your business and help you avoid problems that can occur without this level of detail to guide your business processes.

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