Operating Agreements In LLCs Assist in Their Governance and Operations
It is the dream of many qualified and experienced individuals to start a business on their own, as this gives them more satisfaction to work for themselves, and hopefully does result in better income. Starting a business does require arranging finance, and this means borrowings that have to be paid back. This can put at risk your personal finance and assets. Fortunately, it is possible to form limited liability companies (LLCs) that can help to protect you from such liabilities.
LLCs are business structures that are allowed under all state laws, Illinois being one of them. An LLC is a formal partnership that must have articles of organization that need to be filed with the state. LLCs are easy to set up and provide their members, as their owners are called, much more protection and flexibility. LLC can even get away from paying federal taxes, as long as its owners file the profits that they receive from the LLC as part of their income tax returns. Wages paid to members are deducted from the profits of the company as a part of operating expenses.
Immaterial of the type of LLC that you are starting in Illinois, it is recommended by the state that every LLC has an operating agreement that guides the governance and lays down all the operating procedures that the LLC will follow during its course of business. This operating agreement should clearly list the role of each of the partners and their responsibilities and can go a long way in preventing misunderstandings in the future. This agreement allows even a single-member LLC to preserve its limited liability status, and this is upheld in court. An operating agreement can go a long way in establishing the credibility of a business.
What Is An Operating Agreement in Illinois?
Basically, an operating agreement in Illinois will be a legal document that clearly lays down the ownership structure, even in the case of their being single partner LLCs and the operating procedures that will be followed during its business operations.
The agreement has to list all the members who are part of the LLC and how the ownership is divided among them. When there are a number of members in the LLC, an ownership structure needs to be defined, which can be equal or allot each member’s units of ownership, depending on what they had agreed to before starting the venture. This is often determined by the financial stakes, the expertise and technical know-how, and other entrepreneurial factors that the members may have agreed on contributing to the LLC before making the operating agreement.
LLCs are managed often by their members or by managers appointed collectively by them. Business matters need to be voted on and in most LLCs, every member will have a single vote. But members may decide that some of them have more voting power than the others, but to avoid disputes in the future, this can be clearly laid down in an operating agreement that then makes it binding on all the members.
The operating agreement can list the amount of capital that each member has invested in the new company. It can also include an approach to how additional funds when needed will be raised in the future, and how much each member will have to bring in, once it is decided that additional funds are required for growth, working capital, or others.
Profits and losses are divided among the members. The easiest way to do this is to distribute all of them evenly, but an operating agreement can decide on different ratios of division, and this needs to be listed in the operating agreement so that there is no dispute n the future. This is often based on capital contributions made or the degree of importance of a member to an LLC.
It often happens that the ownership of an LLC undergoes a change when one or more members decide to leave the partnership. It is essential that the operating agreement clearly lay down procedures to be followed for buying out or even replacing the member or members. Partnerships can always breakdown ad this may require the LLC to be dissolved. It is important that the operating agreement clearly defines the process of dissolving the business.
Once an operating agreement is decided on and signed by all members, it may be filed with the state. Every member must be given a copy and records must also be maintained with the business and legal advisers to it. It then becomes a legal document that is enforceable in a court of law, if unfortunately, disputes do arise among members.
Operating agreements can be modified in case a member is lost or need is felt to add to the membership. This need may be also felt when the company goes through a major event that affects its operations. It is important that the agreement lists clearly how such amendments are to be made. It can be with all members having to approve the amendments or just some of them.