What Is An LLC Operating Agreement?
A business entity is a function of its components. So, what is an LLC operating agreement?
LLC Operating Agreement
Limited liability companies, better known as LLCs, are a fairly recent business and legal phenomenon. While corporations have been around for hundreds of years, the limited liability company has only been around since the late 1970s. In truth, it only became a viable business entity in most states in the early 1990s.
While the LLC is known as a more flexible version of a corporation, it contains similar components. A corporation is governed by its bylaws. These basically set out how the corporation will be governed in relation to board of directors elections, meetings and so on. The bylaws also set out various procedural matters such as shareholder rights, the sale of shares, the state law governing the corporation and so on.
An LLC operating agreement essentially forms the same function as the bylaws of a corporation. The agreement sets out basic things such as the state of organization, the name of the LLC and so on. It also sets out more critical matters such as how the members [owners] can vote, object and manage the entity.
One area where the LLC and corporation differ has to do with recorded ownership interest. The “owners” of a corporation are known as shareholders. An LLC does not have shares. As a result, the owners are known as “members,” and they own percentage interests in the LLC. These interests are often recorded at the end of the initial operating agreement.
Much like the bylaws of a corporation, an LLC operating agreement can be both a thick and complex document or a relatively straightforward procedural manner. It all depends on how many members there will be and the nature of the business.
