A Limited Liability Company (“LLC”) is a type of business structure that can combine the pass-through taxation of a partnership, or sole proprietorship, with the limited liability of a corporation. As such, it has become the preferred manner of conducting business for many new business enterprises. Originally, most states required that there be two or more “members” in order to form an LLC; however, most states, including Arizona, now allow single member LLC’s.
An Operating Agreement is the agreement between the owners (members) of the LLC that outlines the business’s financial and functional decisions including rules, regulations, and provisions. It is a contract between the members that expresses, in writing, what the rights and obligations of the members are to each other and to the entity. It can include any number of provisions including ownership interests, voting rights, limitations on member’s authority, divisions of profits, information rights, succession rights, etc.
Unlike California and four other states, Arizona does not require that an LLC has an Operating Agreement. If you are a solely-owned LLC, it may not be necessary for you to have an Operating Agreement. However, you may want, or need, to have such an agreement even if you do not have any other members.
The main reason someone, whether a sole practitioner or a sole proprietor, forms an LLC is to limit liability so that they are not personally liable for the debts and other liabilities of the company. However, to assure that your protection from liability is established, you need to conduct your business as an LLC, and an Operating Agreement is good evidence of your operation as an LLC.
More importantly, if you have partners (other members) in the enterprise, the Operating Agreement can spell out the agreement and understanding of the respective members. If you have three members, for example, can any one member bind the LLC to a contract? Do all business decisions require all three partners to agree, or does majority (2 out of 3) control? What is a member’s obligation to provide further capital if more money needs to be invested in the business? Can a member sell or transfer their interests without restriction? What happens when a member dies? These are just a sampling of the issues an Operating Agreement can cover.
An Operating Agreement may be a simplified document, often referred to as a “boiler plate” document, that contains most common provisions that can be “tweaked” to the LLC’s specific needs. Or, it can be a complex, highly customized, and often negotiated document that is very detailed and specific to the individual concerns of each member. If you do not have an Operating Agreement, your business is subject to the state’s default statutory provisions, which may or may not be acceptable to your company and its members. The cost of an Operating Agreement is largely dependent on the complexity of the agreement and how much negotiation/modification is needed to resolve any issues between the parties. If you find that you need an Operating Agreement for your business, please call the Carroll Law Firm today at 623-551-9366!
