An operating agreement is a legal term usually used in corporate law, which defines the company’s business as well as the members’ rights and duties. It also defines the managerial roles of each member. Usually, an operating agreement is applicable to LLCs rather than any company. In some states, an LLC is obligated to have an operating agreement as a prerequisite for doing business in the state.
In other states, however, the LLCs do not necessarily need to have operating agreements in place for them to do business. In such cases, it is up to the business owners to decide whether to sign the agreement or not. If not, the LLC is then governed by the state’s relevant statutes by default.
Operating agreements tend to be detailed, providing information about members’ rights, entitlements and powers. For instance, they define how profits are shared between the company owners, as well as how tax will be handled. In addition to that, it may also contain information regarding the management of the company’s accounts.
The detailed nature of an operating agreement and the fact that they are mandatory in some states means that one has to be keen when drafting them. It is very easy to miss critical elements that should be in the organization agreement particularly if it is drafted by an individual who is not familiar with such documents. To avoid this, it is advisable to delegate the service to a corporate attorney, who will draft the operating agreement depending on the needs of the business owners and members.