Aside from the documents required to form a limited liability company under state law, the LLC Operating Agreement is the most important document for a limited liability company.

The LLC Operating Agreement generally accomplishes two major things but it can be much more.  The two major purposes: (i) evidence the ownership of the limited liability company and the rights and obligations of the members to each other and the LLC; and (ii) impose a governance structure which is a set of rules addressing how the limited liability company will govern itself and operate in a day to day basis.

I.  ESTABLISHING OWNERSHIP AND OWNERSHIP ATTRIBUTES TO MEMBERS

When a limited liability company is formed under state law, in most cases the LLC does not yet have owners (called Members).  The LLC once formed is a separate legal entity but it is pretty much a "shell" entity without any personality.  An important but sometimes overlooked action item of the person(s) who set up the LLC is to actually issue ownership interests in the LLC to the Members.

While an LLC can issue membership interests in several ways depending on the simplicity or complexity of the transaction that brings in a Member, the LLC Operating Agreement should evidence who the Members and and how much they own in the limited liability company.

The typical LLC Operating Agreement will list the members, their addresses and how much they own in the LLC (either by a # of membership units or a percentage interest).  The LLC Operating Agreement will also contain provisions defining what the Members receive in terms of profits for their membership interests and how much voting control each member has.  These matters can be proportionate to the relative ownership of each member or it can be tailored based on the agreements among the members.  The limited liability company gives the opportunity for a lot of flexibility when it comes to ownership rights and obligations of Members.

Other Member related provisions you will find in a typical operating agreement address Admission of a New Member, Transfer of Membership Interests, Special Voting Provisions, and, if the LLC is taxed as a partnership, the rights to tax allocations of income, loss and gain.

One advanced Member issue is dealing with what happens to the limited liability company and the ownership of the LLC in the event there are member disputes, disagreements or deadlock among Members when it comes to voting.  This is such an important area for a multi-member LLC to plan for, but it really requires the advice of a competent attorney who can understand the specifics of a particular situation.  The drafting needs to be tailored and can be complex so these matters are not often not included in a standard operating agreement.  It is an issue to we aware of and plan for.  Many LLC businesses will fail not because of the business itself but because of Member deadlocks and disputes.

II.   ESTABLISHING A GOVERNANCE STRUCTURE

A newly formed limited liability company needs a set of governance rules to follow in order for it to operate.  How does the LLC make decisions?  What is the LLC authorized to do?  Who can act on behalf of the LLC and sign documents or open bank accounts?  These questions are all answered in a typical LLC Operating Agreement.

Generally, a limited liability company can be either member managed or manager managed.  With a member managed LLC, the LLC is governed by its Members.  Each Member has authority to manage and bind the LLC but the Members are subject to rules in the LLC Operating Agreement which govern how they vote and what they can and cannot do. 

With a manager managed, LLC, the Members themselves do not manage the LLC business and operated the day to day affairs.  Instead, they elect persons to be Managers of the limited liability company and the manager operate as a Board (similar to the Board of Directors of a corporation) in making LLC decisions and otherwise managing the LLC business.  A person who is a Member can also be elected as a Manager.  This is very common.  It is important for that person to always be aware and to designated the capacity in which he or she is acting in any specific circumstance.

The LLC Operating Agreement will address other governance matters such as the authorized business activities of the LLC, what LLC actions require special voting, the appointment of officers and their duties, and when the LLC will be dissolved.

III. LLC OPERATING AGREEMENT SHOULD BE SIGNED BY ALL MEMBERS.

Another often overlooked task in a small business limited liability company, is that the Members will forget to actually sign the LLC Operating Agreement or will forget to obtain signatures from all Members.  Without the initial members adopting the LLC Operating Agreement by signing it, the LLC runs a substantial risk that the provisions of the LLC Operating Agreement do not really apply to everyone involved.  This can lead to expensive litigation later.

Always, always always, get the signatures of the initial Members of an LLC to sign the LLC Operating Agreement.  Further, always get the signature of any new Members on an agreement where he/she agrees to be bound by the limited liability company’s then existing  LLC Operating Agreement.