If you own a limited liability company in or around Los Angeles, you are probably somewhat familiar with an important document: the operating agreement for your business. If you are looking to form an LLC, this is a must-read article.

An operating agreement is a type of business contract that contains provisions that govern the operation of an LLC. Think of it as the LLC’s equivalent to a corporation’s bylaws.

What should be included in an operating agreement?

An OA must include a detailed description of the terms and conditions agreed upon by the LLC owners, including contingencies that may arise to protect the LLC owners.

It should describe the specific policies and protocols for both the day-to-day operations of the company and for any unique circumstances. For example, the agreement should contain provisions governing what happens if a member decides to leave the LLC. You should also address what to do if an owner dies or divorces their spouse. The agreement should also explain the duties and responsibilities of the members for the day-to-day operations of the business.

In California, the legal authority governing LLC formation does not require an operating agreement (however, it is worth noting that Corporation Code § 17701.02 (s) defines the term “operating agreement”).

Despite not being a legal obligation, having one for an LLC is highly recommended as it is a document that can help protect you and your business. If you form an LLC without an official operating agreement, you will be at the mercy of the state’s default provisions regarding running a business, which may not be what you want. For example, some states require that the profits of a company be divided equally among the members. If you and your business partners have a different profit split arrangement, but lack an operating agreement, you are putting yourself at serious risk if a conflict arises with your colleagues in the future.

Provisions to include in an operating agreement

The great thing about having an OA is that you can individualize them to suit your business needs. However, there are certain provisions that you should make an effort to include in your agreement, including:

• Definitions of key terms used throughout the agreement;

• Official name of the limited liability company;

• The date the LLC was formed and the general purpose for which the LLC was formed.

• The length of time the LLC plans to be in business. In most cases, the duration is “perpetual” unless a specific number of years is designated.

• The main office address, the name of the Registered Agent (to whom the legal documents are sent) and the Registered Agent’s address.

• Contributions from each member and the nature of their contribution (eg, contributions in the form of cash, real estate, intellectual property).

• Member responsibility Statement that debts, obligations and other responsibilities belong to the company, not to the members.

Talk to an attorney to help you properly prepare and present an operating agreement

Although it is possible to prepare an LLC operating agreement yourself, it is a good idea to take the time to speak with an experienced Los Angeles business contract attorney. Having legal counsel will help ensure that your agreement contains the necessary provisions and does not leave out any critical issues or stipulations.

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