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What to include in an operating agreement for your LLC

Creating an operating agreement helps you and your partners establish the operating rules for your business. It also can prevent future arguments and protect your business interests. This is particularly important in Connecticut because of the new Connecticut Uniform Limited Liability Company Act (CULLCA).

The CULLCA is used to govern LLCs when holes exist in operating agreements. For example, if an operating agreement does not specify otherwise, the CULLCA states any changes to the operating agreement must be approved unanimously. Unanimous agreement can be tough to reach. The act also stipulates to add a new member to an LLC, there must be complete agreement among all the LLC members. The exception, of course, is if your operating agreement states agreement does not have to be unanimous. Here are some things you should consider including in your LLC’s operating agreement.

Determine how decisions are reached

Since the CULLCA includes clauses regarding decision-making, you and your partners should address this issue in your operating agreement. You may decide a vote by majority is preferable to unanimous agreement. You could also give members who own more of the business, a larger percentage of the vote. Or perhaps one person will make most business decisions, and only certain choices will require a vote, like adding new members, etc.

Designate how ownership and profits are split

You and your partners could divide ownership based on how much each of you invested in the business. Or maybe one partner invested less, but does more to run the day-to-day business. He or she may deserve a larger percent of the business then. Profit sharing is typically directly tied to ownership in the business. But really, you and your partners can divide these numbers however you deem fair. Just include all this information in the operating agreement.

Include the management and member structure

According to SCORE, an LLC can be member-managed or managed by a manager. If it is member-managed, the business owners direct operations and make business decisions daily. An elected manager runs a manager-managed LLC. Your operating agreement should specify what kind of arrangement the business has and what roles each manager or member plays within the company.

State what happens when a member exits the business

One of the most important elements to include in an operating agreement is what happens to a member’s shares when he or she wants to leave the company. If this is not included, a member could decide to sell his or her shares to a third party. That may leave you and your fellow partners with an unwanted new partner. Consider including a clause that stipulates a departing member’s shares are offered first to the partners. You should also state how ownership is transferred if a member passes away or gets divorced.

Stipulate how the business will be dissolved

Though this is not the first thing on your mind when launching a business, including this information will simplify things if it does happen. Stipulate how assets will be divided, what steps will be taken and who does what.

An operating agreement must be drafted carefully and legally. If done correctly, it can ease tensions between you and your partners. It can also protect your business from outside influences and contribute to your company’s success.

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