What Can the Right Operating Agreement Do for Your LLC?
Steven T. Lowe
When people are starting a limited liability corporation (LLC) in California, most members (owners) of the LLC are often more focused on getting the business off the ground and building a successful customer base than they are with sorting out legal issues. That is a big mistake.
An operating agreement can contain the legal provisions necessary to establish the relationships, duties, and interests of the members to govern future disputes. With the right legal representation to help prepare your operating agreement, your company can build into the future with confidence.
California Operating Agreements
An operating agreement is an agreement between the members of the LLC to organize the LLC pursuant to certain rules. The agreement obligates the parties to act or not act in certain ways and helps to establish guidelines for acceptable business conduct.
Operating agreements can be used to set forth a great many things, including but not limited to:
- the respective membership interests of the members;
- income distribution rules;
- rules for sales of LLC assets;
- how the LLC will be taxed;
- how meetings of members will be called;
- rules for dissolution of the LLC;
- how new members may be added or current members may leave;
- procedures for one member to buyout another;
- rights and duties of individual members; and
- establish the fiduciary duties or exceptions owed between the LLC members.
Setting forth these rules in writing helps everyone in the LLC to understand their roles, limitations, and rights. This can prevent a great deal of strife in the future, even when things look perfect now.
What the Right Operating Agreement Can Do For You
Operating agreements for California LLCs provide a great many benefits, both now and in the future.
When an LLC is properly created and structured, there are certain tax benefits that can be derived as a result. It will require an agreement to be in place in order to make sure that your company structure complies with the law, stays in compliance, and can take advantage of the tax benefits an LLC has available to it.
Protection of Personal Assets
An operating agreement establishes that the company is a separate and distinct entity from its members or member. This means that if the LLC incurs a debt or faces a lawsuit, the individual assets of the sole member or members are protected from personal responsibility. The agreement creates a wall between your personal assets, such as your home, and the liabilities of the business.
Ability to Bring in Investors
A fully and correctly formed LLC has a much greater ability to bring in investors. Unlike a general partnership, for example, an LLC has the ability to grant membership interests to investors without the investor being liable for losses ( other than to the extent of their investment). Also, the investor has only the right to vote on the manager(s) who will run the business on a day to day basis, unless the operating agreement provides otherwise (e.g., that the investor has an economic interest only with no right to vote on who the manager(s) will be).
Consult an Experienced California Entertainment Attorney
An operating agreement can afford your California LLC a great many protections, as well as other benefits. Operating without an agreement can leave you and your business open to many unforeseen legal risks.
An experienced California entertainment attorney at Lowe & Associates can draft your operating agreement to best protect your business against the unexpected. Contact us today for a consultation.