State laws impose differing requirements related to operating agreements for limited liability companies (“LLCs”). Some states, including Connecticut, do not require an operating agreement at all. Others including New York do require this.
Generally speaking, an operating agreement is less important (but still often recommended) for single-member LLCs than for complex or multi-member LLCs. For the latter, the operating agreement is a critical aspect of a small business plan.
An operating agreement mimics a “partnership” agreement and establishes the members’ agreement as to the basic functioning of the LLC: the identity of the members and the process for admitting new members, their ownership shares and capital contributions, the determination of profits, losses and distributions, and management of the LLC. Operating agreements should also incorporate, when appropriate, restrictive covenants including non-competes and non-disclosure agreements and establish parameters for a member’s transfer of his or her ownership share.
The matters addressed in a small business’s operating agreement may seem straightforward, but that assumes cooperation and harmony among the owners. Where there are disputes, as there very often are, the operating agreement is the best protection against costly and time-consuming legal costs.
This content is provided as background and does not constitute legal advice. For more information about our Business and Planning Advisory Practice, or to schedule a free consultation, contact us at info@lalorattorneys.com / 646.818.9870.
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