Two Great Reasons to Have an Operating Agreement Form

If you’re in a limited liability company, it is probably best that you employ the idea of preparing an operating agreement form for your company. These forms will supply your company with the protection they need against certain personal liability matters. It is also one of the best ways of preventing many legal problems and disputes that could come about in business. There are two major reasons that all LLC companies in commercial real estate should possess these forms.

If you’ve established your company to be a limited liability company, then you’re looking for protection of your personal assets in the event of a lawsuit. Having this protection set in place allows for you as the business owner to not be held personally liable for any wrong doing with your business. Many companies just starting off try and add the LLC in order to have that cushion of protection. However, as of late there have been people that are suing companies and have requested that their lawyers get the court to set aside the company’s LLC and make the owners liable. To prevent this from happening to you it is best that you have an operating agreement form.

By having an operating agreement form in place and following the provisions therein, you are given the added protection that the LLC alone may not be able to give. The forms supply the business or legal entity with its individual set of rules and personality. Once the forms have been agreed upon and set in place, it allows the owners of the company to be independent and separate from the business itself. In order to remain protected on a personal level it is important that you implement this right away. That way you’re separated from the liability for the company and its debts or obligations.

The next reason why you should have an operating agreement form for your company is that it can protect all the owners in your company. As more and more people begin to go into business with one another, you could run the risk of having not only client or investor concerns, but with your partner as well. Business is always changing and unpredictable, and therefore you should prepare yourself for it as best as possible. If you have more than one owner of the company, you could end up with creative differences or views on how things are supposed to run.

Having an official operating agreement form is very important. It takes on the role of the official legal evidence of the agreements set forth by the owners about the running of the business. These forms help the company as a whole and leave little room for future misunderstandings, as they provide all the operational concerns and ownership matters.

If you’re not aware of what your operating agreement form should include, you should consider using forms from a professional company. Make sure that you review the documents before agreeing to purchase as you want to ensure that you are getting official documents. When dealing with something as important as the flow of your business you cannot simply use any template. Make sure that the company you use has created forms that are specific to your company’s rules and regulations.

CNC Machine Operators

Even though the CNC machines require little human intervention in the development process of the end desired product, human intervention is still needed when it comes to the computer software programming for the CNC machines. A CNC machine programmer must understand the programming, so that they are capable of accurately telling the machine what to do.

CNC machines a programmed through a sentence like structure that is written in a code that it understands. Each axes that the machine uses, requires instructions for the development of the final project. If you forget to program one of the axes, the product will not turn out; in the same terms, if you program wrong, the axes will do what the program tells them and not what you want them to do.

A CNC machine operator helps on the other end. The programmer writes the code for the machine, but the operator is responsible for downloading the program into the machine and getting the machine set up to properly do the job.

The operator may have to set up the tools in the tool holder for the machine, position the material that is needed for the job in the machine, and then start the machine. If the CNC machine operator is experienced, they will begin to learn the different sounds that the machine makes and will be able to tell just by the sound whether there is a problem with the machine. A more experienced CNC machine operator is required to do this type of work.

Once the machine completes the program and the work progress is done, operators may be switched. At this point in time, a less experienced operator can take over from here. Usually CNC machine operators will start out at the lower level and gradually work their way up as they become more experienced in this type of machining.

Experienced CNC machine operators can detect program flaws and can usually make the modifications to the program themselves. If they notice that the end product is not to the specifications needed, they can fix the problem in the program and continue on with the job. They will not have to take the time to contact the programmer and wait for the program to be fixed.

Limited input from the operator is needed to operate a CNC machine. It is because of this reason that one operator may be able to watch multiple machines. The machines do all of the work and only one person is required to do the set up of the machines. This enables companies to employ fewer people and saves them in the payroll department.

CNC machine operators must adhere to safety precautions just like they would in any other machine shop. Even though the CNC machines are usually completely enclosed and can limit the noise, debris and so on, there are still dangers and the operator will need to abide by the safety rules and precautions. Wearing safety goggles/glasses and ear plugs are a good idea and can help to protect the operator.

Limited Liability Corporation

A limited liability corporation refers to a business unit that has acquired a unique legal structure. It is different from other forms of business structures, like sole proprietorships, partnerships and corporations. It provides the advantages of a partnership or corporation, while being shielded from the disadvantages of these business structures. It is thus a distinct legal business entity, which has risen from a cross between a partnership and corporation. The concept has been around for a long time but it is new to the United States. It is available now in all 50 states in United States, as well as other Anglophone countries. There may be differences, however, regarding fees, and set-up costs, based upon the law in various jurisdictions.

A limited liability corporation is also referred to as a limited liability company. Being a unique amalgamation of various characteristics of corporations and partnerships, it has become a favored business entity for new entrepreneurs and investors. This structure provides the limited liability protection of a corporation without the restrictive conditions imposed on ownership and investment that feature in corporations. The company is an individual unit and the members are not held responsible for the company’s debts or losses (unless fraud is committed or a personal guarantee is provided), like it is in case of a corporation.

The individual owners are called members, and there is no constraint on the number or type of ownership. It is a more informal set-up, with flexible control and management mechanisms followed by the members. Unlike a corporation, there is no necessity of meetings at regular intervals, maintenance of minutes or resolution records. It offers protection from double taxation, and the profits, losses and dividends are shared by the members in proportion to investment.

It offers the advantages of a partnership without the insecurity of profound personal liability in the event of bankruptcy or cessation. It provides the freedom of an informal set-up with planning, distribution and allocation elasticity. The main disadvantage is that it doesn’t provide the benefit of continual life in advent of death of member, dissolution or bankruptcy, unless otherwise stated in the operating agreement.

Difficulties may arise out of the reluctance of investors to put in their money in a company with limited liability. Issuing public or employee shares is not possible, in case the corporation grows and seeks to become a public enterprise. The formalities and agreements may be more daunting and complex than in a sole proprietorship. Difficulties may arise out of classification into a partnership or corporation by default or election. However, limited liability corporations are an extremely viable option for many entrepreneurs, given their obvious advantages.

Setting up a limited liability corporation requires the filing of an article of organization form with the secretary of state of the specific jurisdiction, and payment of the filing fees. Apart from this, an operating agreement, drafted by all members, can be in a written or oral format. This is not a mandatory agreement; however, it helps to ease out the various operational difficulties that may rise due to ownership issues, transfer of membership, distribution of profits, etc.

Basel II and Operational Risk – A Primer

The operational risk requirements of Basel II (International Convergence of Capital Measurement and Capital Standards) place a heavy emphasis on the identification, assessment, monitoring and control of operational risk. The ultimate requirement for reserving capital against operational losses are closely linked to the actions that a bank needs to take to manage these risks. Keeping a banks capital allocation against Operational Risks is a hands-on business, based on controlling and mitigating risk.

Credit risk is well catered for in exceptional detail. Credit risks are clearly understood by all players, for credit is the reason why banks exist. In the current mad scramble to meet the Basel II requirements, credit risks have been getting the lion’s share of attention while far less attention has been given to the operational risk issues. Basel II is more than just reserving capital against credit and operational risk. Now for the first time, banks have to take into account the operational risk aspects as well.

To start with, Basel II provides a range of options for determining the capital requirements of credit and operational risks. This allows banks and bank supervisors the opportunity to select the most appropriate option for their operations and their financial market infrastructure. Additionally, allowance is made for a limited degree of national discretion in the way in which each of these options may be applied.

Based on the Basel II requirements, I summarize briefly what needs to be done to effectively implement the operational risk aspects of this important international standard.

The starting point is the board of the bank and the creation of an appropriate “Risk Management Policy”. It should be remembered that bank boards generally do not have members with operations experience. Very often board members are drawn from business areas within the bank whose primary concern is revenue generation. Operational risk controls cost money and generally reduce profits – which means that they are not really a popular boardroom subject. Bank boards need to be educated and coaxed into the role they have to play in the mitigation of Operational Risk.

To effectively implement operational risk controls it is first necessary to identify the risks and then to establish appropriate written board policies and procedures to reduce these. These policies are the foundation for the development of risk control measures and need to be established for the whole range of operational issues including products, processing, IT & security and business continuity.

Risk mitigation can only be effective if a centralized risk management unit controls the whole risk reduction process. Most banks internal risk functions are fragmented and split over numerous areas (such as IT security, internal audit, physical security etc.) that tends to render a common risk policy ineffective. A critical element in the whole approach to operational risk control is the centralization of this function at a director level within the bank.

Once the appropriate policies are in place the next step is to undertake a risk assessment. Risk assessment is the process that identifies and evaluates the internal and external factors that could adversely affect the achievement of a banking organization’s operational, information and compliance objectives. In the full sense of the word this should cover all the risks such as credit, market, liquidity and operational risk. For our purposes we limit our focus on operational risk alone. Under Basel II operational risk is defined as “… the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events”. This definition includes legal risk, but excludes strategic and reputational risk.

Basel II is specific on the actions that need to be taken in operational risk management. These actions are based on international risk containment standards, most of which have been developed through the Bank for International Settlements. There is a strong emphasis on detailed definitions and documentation relating to the use of the methods, the development of policies and their implementation. There is less focus on technology and more on doing.

Once the Risk Assessment has been completed the previously defined risk reduction policies need to be implemented.

Implementing Basel II is not a once off operation. It is an ongoing process aimed at limiting a bank’s exposure to risks. In the operational area reducing and containing operational risks so as to control the amount of capital that will have to be reserved. This ongoing process can only be achieved through the following steps;

oFine-tune Operational Risk controls – New products, process and techniques will need to be brought under appropriate controls. Existing controls will need to be reviewed and changed where necessary.

oFeedback on Policy – Experience will indicate whether the Operational Risk policy is both effective and appropriate. This may result in the need to refine the Policy and the Controls over time.

Does a Single Member LLC Need a Limited Liability Company Agreement?

A limited liability company agreement is one of the most important documents for a single member LLC to adopt for his or her business. There are several reasons why and there is one important reason why not having this agreement can be disastrous.

A common question is whether a single member LLC really needs an operating agreement? After all, that one person will be the only person who can decide on business matters, receive profit and loss allocations and accept distributions of LLC assets.

BENEFITS OF A LIMITED LIABILITY COMPANY AGREEMENT TO A SINGLE MEMBER

The most common purposes of a limited liability company agreement include issues of control, finance, fiduciary duties that appear more relevant to a multi-member LLC. However, operating agreements can provide owners of a single member LLC the same benefits.

It is essential that a single member acknowledge that his or her limited liability company is a legal entity and business vehicle separate and apart from himself or herself.

While the LLC laws do not impose a lot of formalities for operating an LLC, the legal entity still needs a set of operating and governance rules. One of the biggest mistakes a single member can make is forming an LLC and then ignoring it and not providing it with the standard and typical structures and maintenance required to operate an LLC.

The limited liability company agreement is the tool used for the owner to determine which rules should apply to the operations of the business and the document serves as a user manual for the single owner to consult when maintaining the LLC and making LLC decisions.

BIGGEST REASON FOR A SINGLE MEMBER LLC TO ADOPT A LIMITED LIABILITY COMPANY AGREEMENT

Because a single member LLC has only one owner, it is uniquely susceptible to a challenge by third parties when it comes to the limited liability of the single owner.

Third parties will argue the classic alter ego theory that the veil of protection should be pierced and the single owner should be personally liable for a business obligation because, in essence, the single member is really the true business party running and owning the business that has caused some damage or liability.

Because of this higher vulnerability, it is essential that the single member do what he or she can to succeed in defending this challenge.

By adopting a limited liability company agreement, you are underscoring this challenge because the very existence of an operating agreement evidences the distinctness and legal separation between the single member and the LLC.

This document shows the legal agreements between the member and the LLC as two separate persons and it provides the legal entity itself with its own set of governance and operational rules. It is strong support to show that the single member does and has been recognizing its business as a separate person and this is the essential foundation for limited liability protection.

The good news is that adopting an agreement for a single member LLC is much simpler than for multi-member businesses. There are no conflicts or matters to negotiate among several members.
It really just involves the single person thinking through the best way to operate the LLC business based on what the business entails and what third parties the business will interact with.

One way I recommend starting the process for preparing and adopting a limited liability company agreement is to first focus on what parties will be using it and need to review it. From there, you can be sure your final agreement addresses all the necessary matters.

Making Sense of a Limited Liability Company’s Operating Agreement

Browse any introductory textbook on Economics or Corporate Finance and you will find a section that discusses three legal structures, Sole Proprietorships, Partnerships, and Corporations, under which businesses typically operate. These introductory textbooks however, often exclude a fourth, more recent structure, the Limited Liability Company or, abbreviated, the LLC.

Overview of the Limited Liability Company

The Limited Liability Company is in a sense, an entity that is a hybrid of a Partnership and Corporation and, as a result, is one that provides its organizers some of the benefits of both. Like a Partnership, a Limited Liability Company is generally created as a pass-through entity. This means that all of the company’s profits and losses are incorporated into its owners’ individual federal and state income taxes. If you were one of the owners for example, the profit or loss from your LLC would show up on your 1040 as income and would be taxed at your individual tax-rate.

This pass-through nature of profit and loss lets you avoid the double-taxation issues commonly associated with a Corporation. Another major benefit of an LLC is that it literally limits the liabilities of each owner. Owners of a Limited Liability Company are not responsible for the company’s debts and other obligations, nor are they legally responsible for the other owners’ debts and obligations. Investors and owners only risk losing the capital they contributed.

The Operating Agreement

The Operating Agreement is simply an agreement between the founding members that specifies the obligations and rights of each member, the manner in which the company will be governed, and among other things, the allocation of profit and loss between the members. Here is a cursory overview of the major sections of an Operating Agreement.

Organizational Matters

This section (a) provides for the formation of the business, (b) specifies any restrictions on the name of the LLC, (c) specifies the company’s registered agent and registered office, (d) specifies the company’s corporate headquarters, (e) discusses its purpose and any restrictions on its purpose, and (f) outlines the company’s duration. Given the uncertain nature of startup companies, one should explicitly state that there are no limitations on the type of business the LLC can conduct. Often times the idea you begin with will not be the idea that makes your business solvent.

Members and Capital Structure

This section specifies (a) the name and address of each of the members, (b) each member’s percentage ownership in the LLC, (c) the initial capital contribution made by each member and whether members are required from time to time, to make additional capital contributions, (d) whether loans or services are considered capital contributions, (e) the terms under which new members are added, and (f) whether the members have limited liabilities and if they are personally liable for the obligations of other members.

Governance of the Company

This sections specifies (a) if the company is to be managed by its members or if day-to-day management is to be delegated to employees, (b) the rules and procedures that govern formal company meetings, (c) the actions, such as a sale of the company, that require unanimous member approval, (d) the amount of time each member is required to dedicated to the venture, and (e) rules governing the use and withdrawal of the company’s funds.

Accounting and Records

This section determines how frequently and for how long financial records are available for inspection by the members. More importantly, the section specifies whether the LLC is classified as a pass-through entity, which member is responsible for tax-related matters, and what the company’s fiscal year (typically January 1st to December 31st) will be.

Allocations and Distributions

This section specifies (a) the allocation of net income, net loss or capital gains, (b) the distribution of capital, whether there are restrictions on these withdrawals, and how frequently available cash is to be distributed, (c) whether the company can withhold a portion of the cash distribution to comply with federal and state law, and (d) whether members are liable for wrong or erroneous distributions.

Restrictions on Withdrawal and Transfer of Ownership Interests

This section specifies (a) the terms and conditions under which a member may withdraw from the company, (b) the restrictions on the transfer of a member’s ownership interest, and (c) how a purchase price for the transfer of ownership interests is determined.

Dissolution and Winding Up

This section specifies (a) the terms under which the company may be dissolved, (b) the manner in which the company will be liquidated, (c) and how the company’s assets will distributed upon the winding up of business.

Long, but not complicated

Phew! As you can see the Operation Agreement is lengthy document. It is not however, terribly complicated. Just remember the need for legal protection and rules for practically every conceivable hypothetical scenario. What happens if a member decides to leave? What if one, heaven forbid passes away? What if you want to bring on a new part-owner? All of these, and many others questions are covered by the Operating Agreement. While you can obtain a simple agreement through a company like LegalZoom, you should not operate a Limited Liability Company without one.

Basel II and Operational Risk – A Primer

The operational risk requirements of Basel II (International Convergence of Capital Measurement and Capital Standards) place a heavy emphasis on the identification, assessment, monitoring and control of operational risk. The ultimate requirement for reserving capital against operational losses are closely linked to the actions that a bank needs to take to manage these risks. Keeping a banks capital allocation against Operational Risks is a hands-on business, based on controlling and mitigating risk.

Credit risk is well catered for in exceptional detail. Credit risks are clearly understood by all players, for credit is the reason why banks exist. In the current mad scramble to meet the Basel II requirements, credit risks have been getting the lion’s share of attention while far less attention has been given to the operational risk issues. Basel II is more than just reserving capital against credit and operational risk. Now for the first time, banks have to take into account the operational risk aspects as well.

To start with, Basel II provides a range of options for determining the capital requirements of credit and operational risks. This allows banks and bank supervisors the opportunity to select the most appropriate option for their operations and their financial market infrastructure. Additionally, allowance is made for a limited degree of national discretion in the way in which each of these options may be applied.

Based on the Basel II requirements, I summarize briefly what needs to be done to effectively implement the operational risk aspects of this important international standard.

The starting point is the board of the bank and the creation of an appropriate “Risk Management Policy”. It should be remembered that bank boards generally do not have members with operations experience. Very often board members are drawn from business areas within the bank whose primary concern is revenue generation. Operational risk controls cost money and generally reduce profits – which means that they are not really a popular boardroom subject. Bank boards need to be educated and coaxed into the role they have to play in the mitigation of Operational Risk.

To effectively implement operational risk controls it is first necessary to identify the risks and then to establish appropriate written board policies and procedures to reduce these. These policies are the foundation for the development of risk control measures and need to be established for the whole range of operational issues including products, processing, IT & security and business continuity.

Risk mitigation can only be effective if a centralized risk management unit controls the whole risk reduction process. Most banks internal risk functions are fragmented and split over numerous areas (such as IT security, internal audit, physical security etc.) that tends to render a common risk policy ineffective. A critical element in the whole approach to operational risk control is the centralization of this function at a director level within the bank.

Once the appropriate policies are in place the next step is to undertake a risk assessment. Risk assessment is the process that identifies and evaluates the internal and external factors that could adversely affect the achievement of a banking organization’s operational, information and compliance objectives. In the full sense of the word this should cover all the risks such as credit, market, liquidity and operational risk. For our purposes we limit our focus on operational risk alone. Under Basel II operational risk is defined as “… the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events”. This definition includes legal risk, but excludes strategic and reputational risk.

Basel II is specific on the actions that need to be taken in operational risk management. These actions are based on international risk containment standards, most of which have been developed through the Bank for International Settlements. There is a strong emphasis on detailed definitions and documentation relating to the use of the methods, the development of policies and their implementation. There is less focus on technology and more on doing.

Once the Risk Assessment has been completed the previously defined risk reduction policies need to be implemented.

Implementing Basel II is not a once off operation. It is an ongoing process aimed at limiting a bank’s exposure to risks. In the operational area reducing and containing operational risks so as to control the amount of capital that will have to be reserved. This ongoing process can only be achieved through the following steps;

oFine-tune Operational Risk controls – New products, process and techniques will need to be brought under appropriate controls. Existing controls will need to be reviewed and changed where necessary.

oFeedback on Policy – Experience will indicate whether the Operational Risk policy is both effective and appropriate. This may result in the need to refine the Policy and the Controls over time.

Does a Single Member LLC Need a Limited Liability Company Agreement?

A limited liability company agreement is one of the most important documents for a single member LLC to adopt for his or her business. There are several reasons why and there is one important reason why not having this agreement can be disastrous.

A common question is whether a single member LLC really needs an operating agreement? After all, that one person will be the only person who can decide on business matters, receive profit and loss allocations and accept distributions of LLC assets.

BENEFITS OF A LIMITED LIABILITY COMPANY AGREEMENT TO A SINGLE MEMBER

The most common purposes of a limited liability company agreement include issues of control, finance, fiduciary duties that appear more relevant to a multi-member LLC. However, operating agreements can provide owners of a single member LLC the same benefits.

It is essential that a single member acknowledge that his or her limited liability company is a legal entity and business vehicle separate and apart from himself or herself.

While the LLC laws do not impose a lot of formalities for operating an LLC, the legal entity still needs a set of operating and governance rules. One of the biggest mistakes a single member can make is forming an LLC and then ignoring it and not providing it with the standard and typical structures and maintenance required to operate an LLC.

The limited liability company agreement is the tool used for the owner to determine which rules should apply to the operations of the business and the document serves as a user manual for the single owner to consult when maintaining the LLC and making LLC decisions.

BIGGEST REASON FOR A SINGLE MEMBER LLC TO ADOPT A LIMITED LIABILITY COMPANY AGREEMENT

Because a single member LLC has only one owner, it is uniquely susceptible to a challenge by third parties when it comes to the limited liability of the single owner.

Third parties will argue the classic alter ego theory that the veil of protection should be pierced and the single owner should be personally liable for a business obligation because, in essence, the single member is really the true business party running and owning the business that has caused some damage or liability.

Because of this higher vulnerability, it is essential that the single member do what he or she can to succeed in defending this challenge.

By adopting a limited liability company agreement, you are underscoring this challenge because the very existence of an operating agreement evidences the distinctness and legal separation between the single member and the LLC.

This document shows the legal agreements between the member and the LLC as two separate persons and it provides the legal entity itself with its own set of governance and operational rules. It is strong support to show that the single member does and has been recognizing its business as a separate person and this is the essential foundation for limited liability protection.

The good news is that adopting an agreement for a single member LLC is much simpler than for multi-member businesses. There are no conflicts or matters to negotiate among several members.
It really just involves the single person thinking through the best way to operate the LLC business based on what the business entails and what third parties the business will interact with.

One way I recommend starting the process for preparing and adopting a limited liability company agreement is to first focus on what parties will be using it and need to review it. From there, you can be sure your final agreement addresses all the necessary matters.

Making Sense of a Limited Liability Company’s Operating Agreement

Browse any introductory textbook on Economics or Corporate Finance and you will find a section that discusses three legal structures, Sole Proprietorships, Partnerships, and Corporations, under which businesses typically operate. These introductory textbooks however, often exclude a fourth, more recent structure, the Limited Liability Company or, abbreviated, the LLC.

Overview of the Limited Liability Company

The Limited Liability Company is in a sense, an entity that is a hybrid of a Partnership and Corporation and, as a result, is one that provides its organizers some of the benefits of both. Like a Partnership, a Limited Liability Company is generally created as a pass-through entity. This means that all of the company’s profits and losses are incorporated into its owners’ individual federal and state income taxes. If you were one of the owners for example, the profit or loss from your LLC would show up on your 1040 as income and would be taxed at your individual tax-rate.

This pass-through nature of profit and loss lets you avoid the double-taxation issues commonly associated with a Corporation. Another major benefit of an LLC is that it literally limits the liabilities of each owner. Owners of a Limited Liability Company are not responsible for the company’s debts and other obligations, nor are they legally responsible for the other owners’ debts and obligations. Investors and owners only risk losing the capital they contributed.

The Operating Agreement

The Operating Agreement is simply an agreement between the founding members that specifies the obligations and rights of each member, the manner in which the company will be governed, and among other things, the allocation of profit and loss between the members. Here is a cursory overview of the major sections of an Operating Agreement.

Organizational Matters

This section (a) provides for the formation of the business, (b) specifies any restrictions on the name of the LLC, (c) specifies the company’s registered agent and registered office, (d) specifies the company’s corporate headquarters, (e) discusses its purpose and any restrictions on its purpose, and (f) outlines the company’s duration. Given the uncertain nature of startup companies, one should explicitly state that there are no limitations on the type of business the LLC can conduct. Often times the idea you begin with will not be the idea that makes your business solvent.

Members and Capital Structure

This section specifies (a) the name and address of each of the members, (b) each member’s percentage ownership in the LLC, (c) the initial capital contribution made by each member and whether members are required from time to time, to make additional capital contributions, (d) whether loans or services are considered capital contributions, (e) the terms under which new members are added, and (f) whether the members have limited liabilities and if they are personally liable for the obligations of other members.

Governance of the Company

This sections specifies (a) if the company is to be managed by its members or if day-to-day management is to be delegated to employees, (b) the rules and procedures that govern formal company meetings, (c) the actions, such as a sale of the company, that require unanimous member approval, (d) the amount of time each member is required to dedicated to the venture, and (e) rules governing the use and withdrawal of the company’s funds.

Accounting and Records

This section determines how frequently and for how long financial records are available for inspection by the members. More importantly, the section specifies whether the LLC is classified as a pass-through entity, which member is responsible for tax-related matters, and what the company’s fiscal year (typically January 1st to December 31st) will be.

Allocations and Distributions

This section specifies (a) the allocation of net income, net loss or capital gains, (b) the distribution of capital, whether there are restrictions on these withdrawals, and how frequently available cash is to be distributed, (c) whether the company can withhold a portion of the cash distribution to comply with federal and state law, and (d) whether members are liable for wrong or erroneous distributions.

Restrictions on Withdrawal and Transfer of Ownership Interests

This section specifies (a) the terms and conditions under which a member may withdraw from the company, (b) the restrictions on the transfer of a member’s ownership interest, and (c) how a purchase price for the transfer of ownership interests is determined.

Dissolution and Winding Up

This section specifies (a) the terms under which the company may be dissolved, (b) the manner in which the company will be liquidated, (c) and how the company’s assets will distributed upon the winding up of business.

Long, but not complicated

Phew! As you can see the Operation Agreement is lengthy document. It is not however, terribly complicated. Just remember the need for legal protection and rules for practically every conceivable hypothetical scenario. What happens if a member decides to leave? What if one, heaven forbid passes away? What if you want to bring on a new part-owner? All of these, and many others questions are covered by the Operating Agreement. While you can obtain a simple agreement through a company like LegalZoom, you should not operate a Limited Liability Company without one.