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The importance of a solid LLC operating agreement

On Behalf of | Feb 25, 2024 | Business Law

There are several different business types to choose from when starting a company in North Dakota and other states in the nation. One of these is the limited liability company, commonly referred to as an LLC. One of the most important parts of creating an LLC is constructing the LLC operating agreement. If you do not perform this step properly, it can cause you major problems.

The limited liability company operating agreement

One of the main downsides of a sole proprietorship or partnership is that the owner or owners can end up on the hook for the debts and liabilities of the business. A limited liability company is a business type designed to prevent this. Instead, the company itself is liable and the profits are simply passed through to members. As such, the legal operating agreement that sets up the LLC is especially important. The agreement should include things like:

  • The percentage of ownership of each member
  • Rules for corporate governance
  • Guidelines regarding corporate officers and their compensation
  • A non-complete clause
  • Rules for arbitration or settling disputes
  • Directions regarding the fiduciary duties of members
  • Instructions for how members can leave
  • The process of how the LLC can dissolve

Problems to avoid

Overall, the operating agreement created before your business formation must be thorough. If it’s not, it will certainly lead to considerable problems especially regarding legal disputes and lawsuits needed to clear up issues with the agreement. Such problems can include:

  • Failure to address tax elections related to the Bipartisan Budget Act
  • Ambiguity regarding member voting rights
  • Lack of transfer restrictions
  • No formula for calculating member distributions

These, of course, are only a few of the serious problems members can face if the operating agreement is inadequate or non-existent. While an LLC is designed to protect the owners from the financial fallout of business operations, that will not happen without a solid LLC operating agreement.