The Cornerstone of an LLC — a Strong Operating Agreement

A limited liability company (LLC) is a highly advantageous form of business organization. Like a partnership, members join forces to achieve a common goal. But unlike a traditional partnership, LLC members benefit from a shield — they’re generally protected from personal liability for the company’s debts.

The key to a smoothly functioning LLC lies in a well-drafted playbook: the operating agreement. While Arizona law doesn’t mandate one, running an LLC without an operating agreement exposes your team to potential roadblocks and conflicts. State-dictated rules will govern your LLC by default, which might not align with your specific vision.

A customized operating agreement empowers you to tailor the rules of engagement to your unique circumstances. It fosters clear communication, streamlines decision-making, and minimizes the risk of disputes. This allows everyone to focus on the real prize — growing your business.

These are the essential components of this powerful document:

• Formation and ownership — This section lays the groundwork. It outlines the LLC’s name, address, formation date and lifespan. It clearly defines ownership percentages for each member and details the intended business activities.
• Contributions and distributions — Here, you’ll spell out how initial contributions are made by each member and how future contributions will be handled. It also establishes the profit-sharing and loss-sharing formula, ensuring transparency and fairness.
• Management and decision-making — This section clarifies the roles and responsibilities of both members and managers (if applicable). It outlines the process for electing managers, their term lengths and any compensation they may receive. Voting rights, procedures for member meetings and communication protocols are also defined here. Additionally, it specifies the accounting method used and member access rights to financial records.
• Indemnification — This section clarifies whether and under what circumstances the LLC will cover expenses incurred by members or managers for actions taken on the company’s behalf.
• Membership changes and buyouts — Here, you’ll establish the process for welcoming new members, outlining their capital contribution expectations. This section also sets the rules for transferring ownership interests, including any restrictions or buy-sell provisions. Finally, it details valuation methods and buyout procedures for members who leave due to withdrawal, expulsion or death.
• Dispute resolution — Disagreements are inevitable. This section outlines the preferred methods for resolving them, such as mediation or arbitration. It also specifies the state law that will govern the interpretation of the operating agreement during any dispute resolution process.
• Dissolution — This section defines the events that could trigger the LLC’s dissolution and lays out the process for winding down the business.

The operating agreement can be further customized to include non-compete and non-disclosure clauses and address potential conflicts of interest.

Crafting an effective operating agreement requires expertise. An experienced LLC formation attorney can ensure your agreement is not only functional but also specifically tailored to your LLC’s unique circumstances. This helps you avoid pitfalls and disagreements right from the start.

At Law Offices of Donald W. Hudspeth P.C. in Phoenix, we can take you through the LLC formation process from beginning to end, including the preparation of a solid operating agreement to govern the company. Call us at 866-696-2033 or contact us online to set up a consultation.