What Is an LLC Operating Agreement?
An operating agreement for a Limited Liability Company is a document by which you – an owner of the entity — customizes how your company will operate, hopefully with the assistance of experienced counsel and presumably based on your specific needs. It also, in a structured manner, or as structured as you want it to be, sets forth the LLC’s functional and financial decision-making process.
If you’re familiar with a Corporation’s governing documents, think of an operating agreement as a document that combines (i) a shareholders’ agreement, and (ii) the entity’s bylaws.
Michigan doesn’t require your LLC to have an operating agreement, but if you want to have a workable — and marketable — LLC, it is critical that you draft one when you are establishing your LLC. When each member (i.e., the owners) signs the operating agreement, it becomes a binding set of rules that all Members must follow. The document is drafted to allow you to govern your company’s internal operations according to your chosen rules and specifications. It’s all about you. If you don’t draft an operating agreement, your business must be run according to the Michigan default rules set forth in the statute.
The operating agreement is a document in which the Members set forth the terms of their LLC. It can be as long or short as you want it to be, and it clarifies the company’s operations and management.
How LLC Operating Agreements Work
LLCs can be great investment vehicles. An LLC is easy to form, simple to manage, and limits your personal liability. The powers-that-be created LLCs to combine (i) the pass-through taxation available to partnerships, with (ii) the limited liability protection available to shareholders of corporations.
But one of an LLC’s greatest benefits is the flexibility it allows investors. Your operating agreement can contain buy-sell provisions, earn-in provisions, etc. What if one member is the “sweat”? What if another is the “equity”? What if you want an employee to prove their value before they become an owner? Are you looking for investors? You can do all that, and more, with a well-drafted operating agreement.
Indeed, you cannot take full advantage of choosing to organize your business as an LLC without an operating agreement. It’s most convenient to draft one during start-up as you are filing your articles-of-organization and actually creating your LLC. Many try to skimp on expenses by skipping the Operating Agreement because Michigan does not require that you have one. But you better make sure this is what you want before proceeding.
This agreement protects the status of your company, is critical if there are subsequent misunderstandings, and enables you operate the business according to the rules that you set.
Just as “one size doesn’t fit all,” the state-default-LLC rules don’t suit all. The best way to counter this problem is to contact the experienced counsel at George Law, (248) 470-4300. We’ve drafted everything from basic 5-page operating agreements to nearly 100-page operating agreements that are highly sophisticated instruments addressing all imaginable possibilities. As said above, it’s best to draft you operating agreement early in the process of establishing your entity. But, if you didn’t do so, it’s never too late to put an agreement in place, provided all members agree to it. And, yes, they can always be amended.