What is an Operating Agreement and Do I Need One?
An operating agreement is a very important part of starting an LLC. This document outlines the structure of your financial and working relationships with co-owners, including ownership percentages, profit and loss sharing, rights and responsibilities, and the exit method for a partner or member to leave the business.
By outlining these technicalities ahead of time, you will be better equipped to guard your limited liability status and avoid misunderstandings related to finances and management.
Contact a Tulsa contract lawyer at Helton Law Firm today to create a customized operating agreement that protects your business interests and ensures smooth operations.
How a Tulsa Contract Attorney Can Help Protect Your Limited Liability Status
It’s important to protect your limited liability status, so creating an operating agreement helps establish that your personal liability is limited, should you be taken to court. This is particularly important in single-member LLCs that might be deemed a sole proprietorship if the formalities of an LLC are not followed. A Tulsa business lawyer can help you create a formally written operating agreement that helps establish the LLC as a separate entity.
Define Profit Sharing and Decision-Making Rights For Your Tulsa Business
The operating agreement should also define profit sharing and decision-making rights for LLCs with more than one owner. When financial or managerial conflicts arise, it is easier to refer to the operating agreement than to try to work out the problem when there might be hostility between the owners.
Developing an operating agreement with a Tulsa contract lawyer can allow you to determine what happens with your company if a co-owner dies or becomes incapacitated. Many times, owners are forced to work with the spouses of deceased co-owners because they did not have a plan in place through the operating agreement.
When The Rules of Your Operating Agreement Override State Default Rules
If the operating rules of your company are outlined in your operating agreement, it will override some state default rules (or state laws) that define basic operating rules for an LLC.
As an example, Oklahoma default rules require that, unless otherwise provided in the operating agreement, a majority vote is required to make changes to your company’s operating agreement. This could have a huge impact on the allocation of profit and loss, regardless of initial investment into the LLC.
Key Provisions in an Operating Agreement
There are several other reasons to seek the help of a contract lawyer in Tulsa and develop an operating agreement from the start that works best for your business. An LLC operating agreement will control many issues, but the most common include the following:
- Percentage of each member’s interests in the LLC
- Succession planning
- Members’ rights and responsibilities
- Members’ voting powers
- Allocation of profits and losses
- Management of the LLC
- Rules for meetings and voting, and
- Buyout or buy-sell provisions, which determine what happens when a member wants to sell his or her interest, dies, or becomes disabled
Profit and Loss Distribution and Tax Considerations
Owners of an LLC also receive shares of profits and losses that are called distributive shares. Typically, operating agreements indicate that each owner’s distributive share matches their percentage of ownership in the LLC. If different arrangements are desired, the LLC must follow rules for special allocations.
Additionally, the operating agreement should indicate profit distribution parameters and the method of income tax payment, as these areas will be especially relevant to the day-to-day and month-to-month working of each owner.
Voting Rights and Decision-Making Procedures
Another issue that the operating agreement will address is voting rights. In addition to determining the outcome required for a vote to pass (majority vs. unanimous), the operating agreement should outline how voting rights should be distributed between members.
This is typically done in one of two ways: either A) each member’s voting weight is valued based upon the percentage of interest in the business, or B) each member gets a “per capita” or single vote.
A Tulsa contract lawyer can help you determine these factors in advance because, although the LLC business format lends itself to informal decision making, occasionally a formal vote may be required to resolve certain issues.
Contact a Contract Attorney in Tulsa to Plan Your Operating Agreement?
Our knowledgeable contract attorneys are ready to help you. Call Helton Law Firm at (918) 928-7104 or complete the online contact form to schedule a free consultation.
