Unlike corporations, which are governed by both state and national (Model Business Corporate Act) laws, LLC?s are governed by state laws. Each state provides a basic set of rules for the operation of your LLC. Without an operating agreement, which would set up your own rules of government, the state?s laws would rule by default. For example, if you sell two partners a small percentage of your solely owned LLC. Without an operating agreement (which would spell out your ownership and profit sharing preferences), your new partners could own 66.67% of your LLC and it?s profits based on the state?s default rules.

SETTING UP STRUCTURE
Even without the threat of state-imposed rules, you should use an operating agreement to set up the management and financial structure of your LLC. Again, a corporation automatically has management structure with Officers running day-to-day operations and representing the directors and the directors representing the shareholders. First, you?ll need to decide whether or not you will be manager managed or member managed. Most states default with your being member managed. That is, all members have a role in the LLC?s management and have authority to act on behalf of the LLC. If you wanted to limit authority to specific managers, then you might want to be manager managed. This is often specified in your articles, but is should be spelled out in detail in your operating agreement. Additionally, you?ll want to describe, in the same detail, the ownership & financial structure of the LLC.

OWNERSHIP PERCENTAGES
Owners (members) make contributions in the form of cash, property and/or services and for which they receive a percentage of ownership in the LLC. Typically the percentage of ownership is related to the percentage of overall capital contributed. However, this is up to the LLC and is stipulated in the operating agreement. Often ownership is expressed in percentage terms or number of units.

VOTING RIGHTS
Most management decisions are done informally in your LLC. However, you may wish to specify the need for a formal vote for very important decisions (i.e. sale of company, purchase of another, sale of another members interest in the LLC, etc.). Again, your operating agreement would state when a vote would be taken; how voting power is determined (by percentage ownership or one vote per each member); and whether a majority, unanimous, or some other percentage of votes is required for approval.

Please Rate This Article