LLC Operating Agreement basics. An “operating agreement” for a limited liability company is just what the title says. It’s an “agreement” for how the legal part of the business will “operate.” So what to include in a basic LLC operating agreement? I’ll tell you.
The Basics
The essential parts of an OA are (1) who makes the decisions; and (2) how is the money divided. It sounds simple but the devil is in the details.
Who Makes Decisions According to the Operating Agreement
Now take what I write here as a high-level view of these things. Each state has different rules about decision making for an LLC in their statutes.
Fundamentally, someone running a business with other owners needs to be able to make decisions about how the business is run. I’m not talking about “which kind of pens should we buy for the office,” but rather big decisions. For example, “should the business find and open a second retail location,” or, “should the business take out a million-dollar loan to purchase a new piece of equipment.” Decisions that effect the bottom line, profitability, and long-term growth of the business.
After all, it’s the owners’ money that’s being spent or risked, they should have a say in how it is being spent by the management.
My template operating agreement that I use as a starting point with most new businesses details the kinds of decisions to be made by the owners. It also sets out dollar thresholds where the manager needs to consult and get owner approval for the expenditure. So for example, the owners must be consulted in a circumstance like this:
[When the management wants to] Construct any capital improvements, repairs, alterations, or changes to any facility involving an amount in excess of $__________.
The dollar amount is set when the company is formed, and can be modified as it grows. Let’s say it’s set at $5,000.00. That means, under this clause, a manager can authorize a $2,000.00 roof repair job. But if the facility needs a $50,000.00 roof replacement, he needs to consult with and get approval from the owners.
How Do The Owners Make These Decisions Then?
The answer to that question must be set out in the operating agreement, and your agreement is deficient if it does not contain this. It can be literally whatever you want: 50%+1, two-thirds, 43.77%, whatever.
Whether you do it per person (that is, each member gets one vote) or weighted in some manner (e.g., each member votes in a percentage equal to his capital contribution), it has to be clear before any major decisions take place. It’s a discussion when setting up the business. It’s also a function of how many members the LLC will have. An LLC with three members might be fine with a 2/3 voting majority. In contrast, an LLC with 30 members may require majority vote if a 75% quorum of all members is in attendance at the meeting. That’s the beauty of LLCs – you can do it however best suits your business.
Next up: Splitting the money
If you want this kind of help for your business, contact me at (312) 671-6453 or better yet palermo@palermolaw.com to talk about how we can work together to make your business profitable.
Listen to my podcasts on business law here: BIZRADIO BUSINESS LAW PODCAST
Be sure to check out some other blog posts I’ve written on business law topics, such as Board of Directors for Your Corporation: Statutory Authority