Key Elements of an Effective Operating Agreement

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Key Elements of an Effective Operating Agreement

While Arizona does not require an operating agreement in order to form a limited liability company (LLC), not having one means that your business must operate under the state’s rules and regulations — something that may not be in the best interest of your company.

An LLC’s operating agreement is used to define the duties, rules and processes to run the business as well as settle any member disputes. It is also a critical business document for protecting members from personal liability, since it clearly demonstrates that the business is a separate entity from its members.

To create an effective operating agreement, these key elements should be present:

It Should be a Written Document

You should never depend on oral agreements or “understandings” among members to govern an LLC. An operating agreement should be an unambiguous, comprehensive legal document spelling out operational and financial details among members, including how disputes are to be resolved, how the business will be run, and how ownership can (or cannot) change hands.

It Should be Signed by All Members

In order for an operating agreement to be legally binding, it needs to be signed and dated by all members of the LLC. Although this may be an obvious point, there are plenty of cases where a member did not sign, causing problems later when a dispute arose.

It Should Clearly Detail the Management Structure

LLCs can be managed in one of two ways, either member-managed or manager-managed. There are pros and cons to each structure, depending on the number of LLC members and on how the business is intended to operate.

Member-managed LLCs give each member the authority to act on behalf of the LLC, and is typically used when there is one or two LLC members. A member-managed structure does not usually work well when there are a number of members since it is cumbersome to have many people exercising managerial powers.

Manager-managed LLCs put the power to manage the company into the hands of only certain members who are appointed to act on the company’s behalf. You should discuss the most appropriate choice for your LLC with your business attorney.

It Should Clearly Define Member Interests, Contributions, and Responsibilities

Sometimes an LLC is created by a group of friends or family members and the duties and interests of each member is never formalized. This can lead to conflicts down the road. An operating agreement should clarify each member’s interests, contributions and responsibilities within the company so misunderstandings are avoided.

Williams Commercial Law Group, L.L.P., provides strong legal advocacy for companies at all stages involved in general business lawsuits. We are known for using our skills, experience, and cutting-edge technology to get great results, whether after trial or through a favorable settlement. Call us today at (602) 256-9400 and schedule an appointment to meet with us about your case.

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