LLCs and the noteworthy operating agreement

An operating agreement can be a critical component to a successfully organized Georgia Limited Liability Corporation. It can be a helpful tool to prevent litigation among the members of the LLC.

Under Georgia law, O.C.G.A. 14-11-101, the agreement may be verbal or in writing. The operating agreement’s purpose is to express how the business will conduct its dealings. Members of the LLC may enforce it, as can those not a party to the operating agreement.

As noted by, even if not legally required, the operating agreement of an LLC may be the single most important document of the company. Because it dictates how the business will operate, as decided by the LLC’s members, it is important that the drafters of the agreement leave nothing of basic significance out.

Six basic areas to include in operating agreement

The basic points of an operating agreement often include the following:

  • Definition of percentages of ownership of the LLC
  • Roles and duties of the members and managers of the business
  • Method of resolution of disputes between members of the LLC
  • Explanation of how profits and losses will divide during the life of the business
  • Method to accommodate early exiting members from the LLC
  • Details regarding dissolution of the LLC

Ownership and compensation

Expressly noting the percentage of ownership of each member is especially important. This is notably so if all members did not invest the same amount of funds into the LLC at its inception. For instance, one member may have contributed know-how or expertise, but less investment dollars than another. That member will likely still receive appropriate compensation in ownership for that contribution.

Likewise, while proportional sharing of profits and losses may seem intuitive, that is not always the case. At times, discrepancies may be desirable and the agreement should include those details.

Member exits from LLC and dissolution of business

When a member wishes to leave the LLC, the operating agreement can prevent dispute if it defines the manner of compensation to that member. It can also prescribe how to disperse the leaving member’s shares of the LLC. It may further require a certain minimum amount of time for written notice of the exit decision to help avoid unnecessary disruption of the operation of the business.

When an LLC is undergoing dissolution, the operating agreement can be a source of information as to whether any member can continue the line of business and whether there are non-competition agreements with the other members to better allow him to succeed. The agreement can also define how members will share the assets and liabilities.

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