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Operating Agreement

November 3, 2020 • 2 min read

Through an operating agreement, the investors—or members—set the bylaws for a LLC (Limited Liability Corporation) or SPV (Specialty Purpose Vehicle). This lays out how the members will operate their LLC and lay out how the LLC will be managed.

What is an operating agreement?

According to the United States Small Business Administration, an operating agreement is considered the primary document that is used by a Limited Liability Company (LLC). This agreement is a clear outline of the business’s financial and operating rules for those involved.

An operating agreement will house the internal layout of operations for the business owners, ensuring specific regulations and provisions are covered. The operating agreement will act as the official and binding contract to the members of the LLC.

Why is an operating agreement good to have?

When starting a business with multiple owners, or investors, an operating agreement gives a clear and concise layout of the duties, responsibilities, and regulations of the involved parties.

Other reasons to have an operating agreement can include:

Establish the role of each member: The operating agreement will lay out the role of each member and to which capacity they need to fulfill it.
Tax purposes: When forming an LLC, owners will set up an operating agreement to separate themselves from the business. The operating agreement will help owners show their separateness from the business.
Mitigate State Default Rules: If an LLC has no operating agreement, the state will consider it to operate under “default rules.” This allows the state to regulate how business assets should be disposed of. Giving the state more capacity to regulate business assets.

What should an operating agreement include?

All legal names of the involved parties
Names and Doing Business As names of the business
Company Address
Address of the registered agent, if any

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