- Hi everyone, I'm attorney Aiden Durham
with 180 Law Co in Colorado
and welcome back to All Up Yo' Business.
(logo squishing)
On this episode of All Up Yo' business,
we're gonna talk about operating agreements.
I'm gonna explain what an operating agreement is,
what it typically includes, and why it's so important
that you have an operating agreement for your LLC,
whether you're a multi-member LLC or a single member LLC.
But first, don't forget to like, subscribe
and share and check the description
for links to additional information and resources.
So, what is an operating agreement?
An operating agreement is kind of the internal
governing document for an LLC.
It's a legally binding document
that details the ownership of the LLC members,
how the LLC is managed,
and the overall internal structure of the LLC.
It's a key document for an LLC
because it outlines the financial
and functional decisions of the LLC.
And just overall how the LLC is going to be operated
and managed and the roles of the members
or managers of the LLC and the LLC itself.
There are a few States that actually require
an operating agreement,
but most States don't require it.
Each state has statutes or laws
describing how an LLC can operate.
These statutes will typically address
how an LLC can be managed,
how members of the LLC can be added or removed,
and how other decisions can be made with respect to the LLC.
So in a lot of instances if you don't have
an actual operating agreement,
the state has kind of written one for you.
By default, your operating agreement
is whatever the state statutes say
but that's not always a good thing.
In most situations, and in most cases
the operating agreement can override these State statutes.
For example, if a statute requires unanimous consent
of the members in order to take a specific action,
your operating agreement can override that
and instead require majority consent
for that type of action.
And we want this operating agreement
to be tailored specifically for your business
and organizational structure,
which of course, the statutes aren't,
they would apply to everybody.
Now, I'm going to do a very special members only episode
along with this episode where I'm gonna show you guys
the actual operating agreement form that I use
when I'm preparing an operating agreement
for a lot of my LLC clients.
So, if you're not already a channel member
make sure you join by clicking that memberships tab
so you have access to that video.
I also have a link down in the description
where you can download a free sample single member LLC
for a Colorado LLC.
Now, this is specific to a Colorado LLC
because that's where I'm licensed and where I practice.
But for the most part, these general terms
of the operating agreement will be universal.
So, check the description for that.
So, the operating agreement details and defines
the management and organizational structure of the LLC.
Every operating agreement is gonna look a little different,
they're not all completely the same
and they don't always all include the same kinds
of terms and provisions.
But there are a few key terms that we'll typically see
in an LLC operating agreement.
Usually of course, it will describe the percentage ownership
owned by each of the members,
it'll describe the management, whether it's member managed
or manager managed,
it'll describe the capital contributions of the members
and how, and under what circumstances
additional contributions might be made,
it'll discuss the members
voting rights and responsibilities,
and any requirements with regard to holding meetings
of the members or the managers.
It'll describe how and when the profits
of the LLC can be distributed to the members.
In other words, how and when you can pay yourself
from the LLCs profits.
It'll also describe how the profits and losses
will be allocated amongst the members.
It might go into detail regarding the roles and rights
and responsibilities of the members and or the managers,
and what should be done if there are disputes
or disagreements amongst them.
In a multi-member LLC will typically have provisions
regarding transferability of the membership interests.
In other words, what happens
if someone wants to sell their interest,
or get out of the LLC altogether.
And the LLC operating agreement will also typically cover
how we can dissolve this LLC.
The instances in which the LLC might be dissolved
or might be forced to dissolve.
There's no specific timeframe of when you need to have
an operating agreement prepared,
but generally speaking it's best to have it done right away
as soon as the LLC is formed.
So with multi-member LLCs,
obviously the operating agreement is super important
because it describes the relationship
of the members themselves,
and the relationship between themselves and each other
and the LLC.
It's a way to decide in advance,
what's going to happen if we can't agree on something
or if one of us isn't holding up
our end of the responsibilities,
or if a member wants to withdraw or disassociate
from the LLC, or if we need to get rid of that guy,
or what if one of the LLC members dies
or gets disabled, or divorced, or files bankruptcy.
All of those instances can potentially affect
their membership interests in the LLC.
And we need to know in advance, what's going to happen,
how are we going to handle those kinds of situations?
It may also be possible to amend or modify, or override some
of the fiduciary duties that an LLC member owes
to the LLC or the other members.
Again, this is going to vary State by State
but oftentimes LLC members owe specific duties
to the LLC such as a duty not to compete,
or take business opportunities from the LLC.
And sometimes, again, we can use the operating agreement
to change what those kind of default laws or rules might be.
Also, some States require or that all of the names
and addresses of the LLC members be listed
on the articles of organization,
but not all States require that.
Colorado, for example, doesn't require that.
So the operating agreement is really the only way
that we can put in writing who owns what with this LLC.
How much percentage of this do I own?
The operating agreement is our way to do that
if it's not specified in the articles of organization.
But it's also really important
to have an operating agreement in a single member LLC too.
Now I know this can sound like a strange concept
because you're the only member,
who are you going to disagree with?
Frankly, nah, that's wrong,
'cause I disagree with myself all the time.
But in reality, outside of that
it's still really important
to have an operating agreement
because this goes towards the legal
and corporate formalities that an LLC needs to follow
in order to avoid piercing the corporate veil
or falling under this alter ego doctrine.
Check out this video if you want more information
on alter ego, and how you can avoid
piercing the corporate veil in a single member LLC.
So we don't typically have to file or record
the operating agreement with the secretary of State
or any other agency or branch of government.
Typically, it's kind of just an internal document
that we hold onto for our records
in case something comes up.
But sometimes we do actually need to provide it
to maybe a bank.
Some banks will require a copy of the operating agreement
if you're trying to open a business bank account,
if you're trying to get funding or a loan,
the operating agreement might be required.
And there are occasionally other instances
where we'll need to be able to produce
this operating agreement for one reason or another.
But for the most part,
it's just typically something that we'll keep
in our files and we'll refer to it if something comes up
and we need to know how to handle it.
Again, what if a member wants to leave
or sell his or her interest to somebody else?
What happens if a member dies?
What happens if we disagree on something?
Well, we pull up the operating agreement
and see what it says.
It's also a good idea to review the operating agreement
on a somewhat regular basis, maybe every few years
just to make sure it's still in line
with how we want to operate and manage this business
and see if we need to make any changes,
or amendments or updates to the operating agreement.
That's all for this episode folks,
drop a comment below, let me know what you think.
And again, don't forget to check the description
for links to additional information,
including that free downloadable sample
LLC operating agreement.
And make sure you click the memberships tab
and become a channel member if you want access
to my members only episode
where I'm gonna walk you guys through
and show you the actual operating agreement form that I use.
Thank you all so much for watching,
I'm Aiden Durham and I'll see you next time.
(upbeat music)