Getting your LLC operating agreement right

On Behalf of | Aug 3, 2023 | Business And Commercial Litigation

Forming a limited liability company (LLC) is a popular choice for many North Carolina entrepreneurs due to its flexibility and liability protection. One crucial step in establishing an LLC is preparing a comprehensive operating agreement. While not all states require it, having an operating agreement is highly recommended as it helps define the structure, roles and responsibilities of the LLC’s members and establishes guidelines for decision-making and operations.

Outlining ownership and membership structure

The operating agreement should clearly outline the ownership structure of the LLC, including the names and percentage ownership of each member. It should also specify the process for admitting new members or transferring ownership interests.

Roles and responsibilities

Defining the roles and responsibilities of each member is essential to avoid potential conflicts and misunderstandings. The operating agreement should outline the management structure, decision-making processes and each member’s duties, whether they are active in day-to-day operations or act as passive investors.

Profit and loss distribution

Specifying how profits and losses will be distributed among members is important for transparency. This section should include details on how profits will be allocated, any preferential distributions and how losses will be allocated in the event of financial difficulties.

Capital contributions

The operating agreement should outline the initial capital contributions each member makes to fund the LLC’s operations. Furthermore, it should detail the process for making additional contributions if they become necessary.

Decision-making and voting

Decisions within the LLC may require a unanimous vote, a majority vote or a vote proportional to each member’s ownership percentage. The operating agreement should specify which decisions require what level of approval and how votes will be conducted.

Dissolution and exit strategies

Preparing for the possibility of the LLC’s dissolution or the departure of a member is as important as the clauses that govern the company’s first steps. The operating agreement should outline the process for dissolving the LLC and how any remaining assets will be distributed. It should also include provisions for a member’s voluntary withdrawal or the procedures for handling a member’s death or incapacitation.

Non-compete and confidentiality clauses

Including non-compete and confidentiality clauses can protect the LLC’s interests under business law. These clauses safeguard the organization by preventing members from engaging in activities that directly compete with the company or disclosing sensitive information to third parties.

Governing law and dispute resolution

Finally, the operating agreement should specify which state’s laws will govern the LLC and the methods for resolving disputes between members, such as mediation or arbitration. No arrangement comes without conflict and providing resolution methods will only make operation seamless for stakeholders and customers alike.