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What is an operating agreement and why does your LLC need one?

On Behalf of | May 18, 2023 | Business Formations

Starting any new business is an emotionally-complex undertaking. As exciting as it is, there’s also plenty of stress that comes with it too. Thankfully, taking thoughtful steps and seeking legal guidance can help to minimize preventable stress.

For example, if you’re setting up a new LLC, California law states that one of the documents you’ll need to have in place is an operating agreement.

What exactly is an operating agreement?

It is a legal document that LLCs use to denote how the business operations of a company should be conducted. An operating agreement can also explain how the finances of the business should be managed as well as discussing important topics such as:

  • The ownership percentage of each member
  • voting rights
  • what should happen in the event of dissolution and dispute resolution

An operating agreement offers many benefits

Discussing business ideas in conversation is great and is how most decisions are made. This can, however, cause problems later down the line if there’s no record in writing of these conversations and any agreements made while LLC members were chatting.

An operating agreement can solve this problem by making sure you document in writing how the business should be managed and structured. It’s important for LLCs that have multiple members as it forms a binding contract for all parties, explaining the roles and responsibilities of each person.

Starting a business means dealing with a lot of paperwork and making lots of decisions. Having the assistance of a legal professional can help you to make sure you have all the necessary documents in place that you need, including an operating agreement for your new LLC that properly protects your interests.