What is an operating agreement and why do you need an operating agreement for your LLC? Many business owners decide to structure their businesses as a limited liability company (LLC) because of the liability protections and other benefits this type of entity has to offer. Unfortunately, many of these same business owners will just file the necessary paperwork with the AZCC (Arizona Corporation Commission) and be done with it. This can lead to a few mistakes that will arise in the future. Listed below are a few reasons why having an operating agreement in place can assist with many problems that could arise within a business:
What is an operating agreement? An operating agreement is essentially the governing document for your LLC. It lays the ground rules on matters such as how the business should be managed, by who, how decisions should be made, and how disputes between members should be resolved. In other words, it is basically a contract between you and your business partners (the other members) that is binding once signed by all the members. In Arizona, you are not required by law to have an operating agreement. However, for the reasons we discuss here, it is almost always best practice to have an operating agreement for your LLC.
What Sorts of Things Are Included in an Operating Agreement?
An operating agreement covers general affairs for the LLC and often includes the following provisions: each member’s ownership interest in the business; terminating and winding up the LLC’s business affairs; members’ duties and responsibilities; voting rights for the members; when meetings should be held and how often; various powers of the members; how profits and losses should be split between the members; how the LLC should be managed (either by the members themselves or by a specific manager). It is the quintessential document that gives away who is in charge of the business from a pyramid perspective, with the top of the pyramid being the owner/CEO.
What Happens if I Do Not Have an Operating Agreement?
What happens if I don’t have an operating agreement? The problem is that if your LLC does not have an operating agreement, it will be subject to the default rules underneath the legislature that Arizona falls under. To further jumble matters, Arizona overhauled its LLC laws in 2019 (went into effect in 2020) which marked a dramatic turn from the previous law. As you can imagine, these default rules do not always lead to the best outcomes for you and your business nor do they take all situations into effect. You should also note that Arizona law permits business owners to create many of their own rules for how to operate and manage their LLCs via an operating agreement that can override the default rules. So you would be doing yourself a favor by getting out ahead of any future mishaps with your LLC by having a readily available operating agreement in place, even if you’ve had a running business for years there is no wrong time to implement an operating agreement.
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