LLCs or Limited Liability Companies are one of the most popular business setups in the United States. They combine partial liability protection for their owners with a flexible administrative structure. US states even offer the option to put in writing your own customized management layout with a document called Operating Agreement. Now, let’s dig deep and see what is an LLC Operating Agreement and how it can benefit your business in the US.
What are Limited Liability Companies?
By forming an LLC in the United States, you’re able to separate your personal assets and liabilities from those of the company. LLC members (owners) have partial liability protection and are able to enjoy a less regulated way to run their business.
LLCs do not pay any federal income taxes and their members are only required to do so on a personal level after the company’s profits are distributed. Contrary to Corporations, LLCs are not able to issue stocks or shares, for which their only way to attract outside investors is through equity or debt sale.
Now, let’s see how you can establish your own internal structure with an LLC Operating Agreement.
What is an LLC Operating Agreement?
The Operating Agreement is the document signed by all the LLC members, that establishes specific internal regulations within the company. Some US states will accept your LLC’s Operating Agreement submission, while others will not. The Agreement doesn’t need to be notarized, (although it is recommended), but only signed by each company owner (member).
What is included in an LLC Operating Agreement?
There are some key elements that you can or should include in your LLC’s Operating Agreement.
Just like in the Articles of Organization document that you submit to the state to register the company, the Operating Agreement must include some basic business information to identify your LLC.
- Business name
- Physical business address
- State and date of formation
- Registered Agent information
One of the main reasons for you to understand what is an LLC Operating Agreement and how it can benefit your business is the membership structure.
In this section, you should include what are the responsibilities and roles of each member, as well as their ownership percentages. This will affect how profits are distributed and the command chain within the company. This is a tool you can use to strengthen your personal liability protection and further separate your company’s financials from yours.
There are two main ways in which an LLC can be managed: member-managed or manager-managed. The first one is when a determined number of members is anointed to run the day-to-day processes and make the key business decisions. The other option is when a consulting agency or an external manager is hired by the members to supervise the operations.
In either case, the LLC Operating Agreement must specify the powers, responsibilities, and pre-established tenure of the manager(s). All managers have to be listed with their full names and personal addresses.
Capital raising and protocols
Your LLC Operating Agreement can elaborate on each member’s voting rights/powers, procedures to raise capital or add new members, and protocols for exits or LLC dissolution.
Remember that one of the key factors when drafting your Operating Agreement is to establish clearly each member’s responsibilities and to strengthen partial liability protection. So the more scenarios you can define protocols for, the more protected you are in case of corporate claims. You can also reinforce this aspect with a Liability Statement section.
If you want your LLC to be treated as a Corporation by the government, you can fill out and submit Form 8832 to the IRS. You can also contemplate this taxation treatment in your Operating Agreement if you wish.
How does an Operating Agreement benefit you?
- It prevents internal disputes within the LLC. Your Operating Agreement protects the well-being of your business by documenting protocols and responsibilities. Breach of duties and mismanagement can be better identified if they occur, therefore strengthening each member’s protection against corporate claims.
- It fortifies the corporate veil. Business claims are harder to be made against natural persons when partial protection and role differentiations are already contemplated in internal documents such as the Operating Agreement.
- It improves efficiency. Goals and objectives are easier to achieve when strategies are discussed and approved by pre-determined, agreed-upon protocols.
Create your own LLC in the United States and enjoy the freedom of drafting your own internal procedures. Protect your assets and do business in the most profitable market in the world.
States like Delaware or Wyoming not only offer relaxed tax rates but also have a history of acknowledging LLC Operating Agreements to support businesses against claims. Both national and offshore companies can enjoy the benefits of this system.