Key Elements of an LLC Operating Agreement
You may be considering starting a business, and establishing it as a Limited Liability Company (LLC). If so, there are several key elements that you should include in your LLC operating agreement to ensure that your legal rights are protected.
Equity Structure
The equity structure of a business includes contributions, capital accounts, and how profits and losses are allocated. You should make sure that the membership interests, classes of membership interests, and the contributions and capital accounts are all addressed within your operating agreement. Additionally, your operating agreement should clarify exactly how the profits, losses, and distributions will be allocated among all members.
Management
You have the right to determine whether your LLC will be managed by members or managers. If your LLC is manager-managed, you should include a section in your operating agreement that directly discusses the appointment of management, voting processes, manager duties and responsibilities, and how managers may be removed if necessary.
Voting Rights
The standard rule is that members of an LLC may vote in proportion to their percentage interests. However, this rule may be changed in an operating agreement. All voting rights can be determined by the owner and can include veto rights or supermajority votes.
Limitation of Liability
When you develop your LLC operating agreement, you should ensure that you address all fiduciary duties, responsibilities, and liabilities with respect to managers. Contacting an experienced business attorney can help ensure that you uphold your fiduciary obligations.
Books and Records
Always make sure to include a section in your operating agreement that discusses record-keeping and the rights of an LLC member to inspect any accounting records or corporate records.
Anti-Dilution Protection
In some cases, a company will grow and offer new membership interests to additional parties. Your operating agreement should include an anti-dilution provision that protects certain members with specific interest percentages with respect to their voting rights, capital calls, or any other pre-emptive rights regarding their ability to purchase other classes of membership being offered.
Restriction on Transfer
Your operating agreement should directly address how membership interests may be transferred, and if those transfers will include management rights, veto/approval rights, or other originally established rights.
Confidentiality and Non-Compete Clauses
In many cases, your business will have trade secrets or patents regarding the services or goods your business sells. You should always include non-compete clauses, non-solicitation clauses, as well as confidentiality agreements in your operating agreement.
Contact an Experienced Business Attorney
Establishing an LLC and creating an operating agreement can be legally challenging and complex. Any oversight or missed details can prove to become legal headaches at a later time. Make sure that all of your intentions are executed correctly in your operating agreement by visiting with an experienced business attorney at the Law Office of Kris Mukherji at (858) 442-5747. We can help ensure that you have all of your questions answered, and will help you determine how exactly to create an operating agreement for your new LLC that exactly meets all of your legal needs.