Corporate Law Blog

The LLC's Most Important Document: The Operating Agreement

Deciding on the entity form to use for your business depends on a number of factors, but for many entrepreneurs, an LLC is the best fit. An LLC is a hybrid entity as it provides liability protection similar to a corporation and favorable income tax treatment similar to a partnership. If you are starting or currently operating a business through an LLC, your most important organizational document is the agreement between you and your partners: the Operating Agreement. An operating agreement establishes the internal operations of the business in a way that suits the specific needs of the business owners. Once signed by the members of the LLC, it is an official binding contract.

Another benefit of using an LLC to operate your business is the flexibility LLC owners have to structure their operations and business relations with their partners. While the Kentucky Limited Liability Company Act contains default provisions for many of the organizational issues that may arise, members of an LLC may agree to operate under provisions other than the Act's default provisions. No matter the nature of your business, your LLC should have an operating agreement that includes details such as voting rights and responsibilities, powers and duties of members and managers, allocation of profits and losses, and distribution of capital, whether the members agree to use the LLC Act's default provisions or alternatives to the default language.

It is extremely important to carefully consider the effects of each section of your operating agreement. A well-written, thorough operating agreement will help your business run smoothly. No operating agreement, or one that is incomplete or ill-considered, can cause your business to run amuck. In my next post, I'll detail three specific provisions that should be included in every operating agreement.

This article does not constitute legal advice.