When starting a business, one of the most important decisions you`ll make is choosing the type of business structure that`s right for you. For most small businesses, forming a limited liability company (LLC) is the way to go. LLCs offer a combination of personal liability protection and tax flexibility. However, once you`ve decided to form an LLC, you`ll need to determine what type of legal agreement your LLC will adopt: an LLC operating agreement or an LLC agreement.
An LLC operating agreement is a document that outlines the rules and regulations your LLC will follow. It governs day-to-day operations, outlines each member`s roles and responsibilities, and sets the procedures for decision-making and dispute resolution. It also defines the LLC`s ownership structure, member contributions and distributions, and how profits and losses are shared among members. Essentially, an LLC operating agreement is a guidebook for how the LLC will operate.
On the other hand, an LLC agreement is a legal document that establishes the LLC as a legal entity. This document is required by state law to create an LLC, and it typically includes the LLC`s name, purpose, and registered agent. It also outlines the number of members in the LLC, how the LLC will be managed, and when its fiscal year will begin and end. While it`s not as detailed as an operating agreement, an LLC agreement is still an important document that legally establishes the LLC as a business entity.
So, which one do you need? The answer is both. While an LLC agreement is required by law to form an LLC, an operating agreement is not mandatory in all states. However, it`s still highly recommended that you create one. An LLC operating agreement provides clarity and structure to your business, reducing the risk of misunderstandings or disputes among members. It also helps to protect your LLC`s limited liability status.
In some states, if you fail to have an operating agreement in place and a dispute arises, the state`s default rules will apply. These default rules may not be in your LLC`s best interest and can lead to costly legal battles. By creating an operating agreement, you can ensure that your LLC is governed by the rules and regulations that best suit your business.
So, when it comes to LLC operating agreement vs LLC agreement, the answer is clear: you need both. While an LLC agreement is required by law, an operating agreement is essential to the smooth operation of your LLC and to protect your business from potential legal disputes. Whether you`re starting a new LLC or operating an established one, take the time to create a comprehensive operating agreement to help ensure the success of your business.