An Operating Agreement is a legal document used by limited liability companies (LLCs) to structure, among other things, the businesses’ finances, tax structure, membership rights, member and manager obligations, and business functions. The legal document is intended to govern the internal operations and should be tailored specifically to fit the particular business and the members specific needs. Once the members of an limited liability company sign an operating agreement, the legal agreement becomes a binding document, enforceable against each of the members and the LLC in court.
An operating agreement is essential in order to protect the limited liability status of LLCs. The operating agreement allows members of the limited liability company to shield themselves from personal liability for certain types of business actions and conduct. Operating agreements also clarify and solidify expectations and terms between the members that may have been discussed verbally. In case of conflict between the members (member dispute), operating agreements are referred to as a way to resolve member disputes. Moreover, if a the members of an limited liability company fail to draft an operating agreement, Illinois State default rules apply to the LLC (Illinois Limited Liability Company Act). Illinois State rules are often broad, and the imposition of these general rules on a limited liability company and its members is often problematic and undesirable.
Operating agreements outline the functionality and internal operations of a LLC.
Elements of Operating Agreements Include:
- Percentages of members’ ownership;
- LLC rights, as a party to the agreement, with respect to third parties;
- Member contribution obligations and priority returns, if any;
- Members’ voting rights and responsibilities;
- Members’ and managers’ powers and duties;
- How profits and losses will be distributed;
- How each members taxes shall be paid in connection with LLC income;
- Rules for buyouts and membership transfers;
- Member dissociation terms and conditions;
- LLC dissolution procedures
- Buy-sell procedures in the event of a change of control, merger and acquisition.