LLC Operating Agreement
This is an agreement that is like corporate by-laws, or a partnership agreement. The operating agreement defines each member or manager's rights, powers and entitlements. This includes capital accounts, membership interest, distributions of profit and allocated tax responsibility. This internal document is an agreement set by the company members that contains provisions for critical items and rules that run the company. Operating agreements can be amended at any time by the company members or managers.
An operating agreement will give members protection from personal liability to the LLC. Without that formality, the LLC can resemble a sole proprietorship or partnership to a civil court. State rules will govern an LLC without an operating agreement. The default rules defined by the state might not be suitable to the LLC or cover specific legal liability.
Example items covered in an operating agreement:
- Percentage of each member ownership
- Voting rights and responsibilities
- Powers and duties of members and managers
- Distribution of profits and liability of loses
- Regular meeting requirements
- Buyout and sell rules or ownership or share transference.
- Ownership issues involving death.
Presenting an LLC operating agreement is required in most states during the acquisition of real estate. If the real estate being purchased will be owned by the LLC, it will be necessary to present an operating agreement prior to title transfer. Real estate LLCs generally involve private placements of securities, and U.S. securities law tightly controls the transferability of securities that have not been publicly registered with the SEC. In addition, the LLC’s operating agreement will often provide for rights of first refusal. This defines the right of the company, or of other members, to purchase any interests that a member would like to sell.
The operating agreement of a real estate LLC usually provides that the manager will not be liable to the limited members for mistakes or errors in judgment that it made in good faith. Operating agreements used by in real estate LLCs generally follow a common template. The insulation from personal risk exposure for real estate LLCs, combined with the relative ease of administration and potential tax benefits, make ownership of investment property through an LLC a wise option in most instances.
