What Is An LLC Operating Agreement?
An LLC has emerged as the prevailing choice for business structures today. It brings together the strengths of various business types into a unified package. For example, unlike a corporation, forming an LLC in Georgia is simpler, yet it offers greater safeguards and advantages than sole proprietorships and partnerships.
LLCs require less paperwork to form and maintain and are cheaper to start compared to other incorporated businesses. They allow owners, called members, to choose how the company will be managed and taxed by the IRS. Moreover, they provide members with personal asset protection in the event the business gets sued for valid reasons.
In order for an LLC to run as intended, however, members need to establish guidelines on how the company will function. This document is called an Operating Agreement.
Operating Agreements are internal documents containing mechanics or instructions on how the LLC is meant to function. They serve as an operating manual, providing details about the LLC, its members, and what each member does for the company. These documents also have instructions on how profits and losses are handled, how members earn from the company, and so on.
Operating Agreements allow members to customize the relationships between themselves, in a way that meets the business’ needs. They are largely similar to Articles of Incorporation, particularly because they are used to describe how members govern the LLC. The main difference between the two is that the Operating Agreement does not need to be submitted to the state for review.
Does Georgia require all LLCs to have an Operating Agreement?
The state of Georgia does not require LLCs to have Operating Agreements. However, you will need one if you want to make it easy for you and your co-members to do business together. This document will ensure smooth business operations, clarify responsibilities and authority, and guarantee fairness with regards to finances and major decision-making in the company.
Your Operating Agreement becomes binding after all of your LLC’s members sign it. This document will make sure everyone falls in line and follows the rules you have all agreed on. It will help you avoid and solve potential disputes, prevent misunderstandings including those related to revenue management, and secure your company’s limited liability status.
What Are The Advantages Of An Operating Agreement In Georgia?
Your Georgia LLC will benefit from an Operating Agreement in some ways, primarily:
It helps ensure your company’s limited liability status
An Operating Agreement acts as a formal document separating your LLC from its members. Courts will recognize this document and honor your company’s limited liability status. This benefits all LLCs, but those with only one member enjoy this advantage the most.
It clarifies how your company does things
Operating Agreements contain detailed instructions on how things should be done inside your company, providing clarity on how tasks are divided among members or managers. Because of this, your LLC can avoid any potential issues that may arise—including handling profits and losses—during operations. And if ever certain problems arise, the instructions included in it will help you solve them.
It ensures accountability among your LLC’s members
An Operating Agreement, as their name implies, serves as a formal set of company rules and regulations your LLC’s members have discussed and agreed on. It is used to enforce accountability among everyone in the company. This makes it an essential document, especially as the company grows.
This document becomes binding once signed, and everyone has to abide by the provisions included in it. Those who fail to or violate the provisions can be sued by other members, especially if they are placed at a disadvantage.
It helps owners gain more control over the company
Without an Operating Agreement, your LLC will have to be governed by Georgia’s state rules. While this isn’t bad at all, being able to run your business according to your preferences makes it easier. This document will let you keep the state rules at bay.
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What Are The Limitations Of An Operating Agreement In Georgia?
Operating Agreements are very helpful in running your LLC and keeping it safe from potential issues that may arise. It does not, however, prevent all sorts of disputes from occurring. And while the internal document can help you run your business according to your preferences, it will in no way allow you to contradict Georgia’s state laws or bypass them.
More importantly, no matter how binding and powerful an Operating Agreement is, your LLC’s members still own the choice to follow the rules and regulations prescribed in it.
What Should You Include In A Georgia LLC Operating Agreement?
Operating Agreements are customized to meet the needs of the businesses they are created for. Because of this, no two of them will be very similar to each other.
Your Operating Agreement must cover all bases with regards to your company’s operations. This means including instructions or provisions for everything, from making big company decisions to the small day-to-day routines. To create a good Operating Agreement for your LLC, you must include the following:
Details about your LLC as indicated in your Articles of Incorporation
Your LLC’s business purposes and powers
Information about your LLC’s membership, including names, addresses, positions, and ownership percentage figures
Your chosen Management Structure for your LLC
The roles and responsibilities of each member
Instructions on handling Profits and Losses
Guidelines for your LLC’s Meetings and Voting Procedures
Guidelines on Record Keeping and Financial Reporting
Guidelines on Limitation of Liability and Indemnification
Provisions regarding Dissolution and Winding Up
Guidelines for Resolving Disputes
Provisions for Amendments and Modifications
We’ll discuss the above in more detail below. Moreover, you must also consider your company’s size, the industry it belongs to, what you want to offer to clients, and your personal preferences when it comes to running your business.
How To Form An Operating Agreement
Forming your Operating Agreement takes a bit of time and effort. You need to be meticulous when it comes to the details to avoid any loopholes. We highly recommend that you employ lawyers for professional help. You can also follow our tips below so you can create it personally.
Your LLC’s information
Your Operating Agreement must provide information identifying your LLC. The details given must be similar to those indicated in the Articles of Incorporation you submitted to the Georgia Secretary of State while you were forming your company.
You need to include the following:
- Your LLC’s name
- Your LLC’s business address address
- Your Registered Agent’s name
- Your Registered Agent’s address
Do not forget to insert details about your Registered Agent. They will be receiving legal documents pertaining to your company on your behalf.
Your LLC’s Business Purposes and Powers
Your Operating Agreement must specify the purposes for which it was formed, as well as what you intend to do after your LLC achieves that. This is because LLCs are expected to shut down after fulfilling their purposes by default. Specifying what you intend to do after your LLC completes its mission can prevent or finalize its dissolution.
Your LLC’s membership details
Next, you must provide information about your LLC’s membership. This means specifying information about its existing members, the rights and responsibilities of each member, and their contributions and interest percentages. Instructions related to changes in the membership should be included as well.
Specifically, your Operating Agreement must provide the following details:
- Your LLC’s initial members’ names and addresses
- Your members’ capital contributions
- Your members’ ownership percentages
- Guidelines for when adding new members
- Guidelines regarding the transfer of membership interests.
- Guidelines regarding withdrawal of membership from your LLC. Details about the procedure and consequences of withdrawing from your LLC must be included.
Your LLC’s Management Structure
Next, you must also specify what type of management structure your LLC has. This is important as your management structure determines your membership’s level of active involvement in your company.
There are only two structures, each with its different characteristic:
- In Member-managed LLCs, the members are the ones actively managing and running the daily operations. There’s no need to assign the management to managers outside of the membership.
- In Manager-managed LLCs, the day-to-day management of the business is entrusted to a manager appointed by the membership. In this setup, members take on a more passive role and receive feedback or reports on the business’s progress and dealings from the manager.
Membership roles and responsibilities
Your Operating Agreement must specify, in great detail, the roles and responsibilities that each member of your LLC has. This helps you clarify the tasks assigned to each member, and reminds everyone about the expectations given to them. By doing this, you can avoid potential management misunderstandings, and also prevent disputes that may arise if some members overstep their boundaries with regards to authority.
Instructions for handling profits and losses
Your Operating Agreement must also contain clear and concise instructions regarding the handling of profits and losses incurred by your LLC during operations. These instructions must include details regarding the distribution of profits to members. Specify the percentages of distribution, and how and when profits will be distributed. Details regarding the distribution of losses among members should also be provided.
Guidelines for meetings and voting procedures
Your LLC’s membership must regularly hold meetings to provide updates on the progress of operations. Sometimes, you will also schedule meetings to address issues as they appear. Regardless of the purposes for these meetings, your Operating Agreement must provide guidelines on how these meetings are held. Details regarding your company’s decision-making process should also be included.
In particular, your Operating Agreement must discuss the following:
- The process of organizing, scheduling, and conducting meetings
- The process or mechanics of informing all members about upcoming meetings
- Guidelines on rescheduling meetings in case some members are not able to attend
- Details regarding every member’s right to contribute to the decision-making processes of the company
- Mechanics for voting, and details about the vote-counting process
Guidelines on Record Keeping and Financial Reporting
Your company needs to be transparent and trustworthy when it comes to its finances. To ensure this, your Operating Agreement needs to have guidelines that cover recording of financial transactions and reporting of your financial status.
This part must include the following:
- Details related to your accounting and record keeping. Explain how your accounting system works in your Operating Agreement. This system is used to monitor financial transactions, revenues, expenses, and tax obligations.
- Your company’s fiscal year. It could be a calendar year, or any 12-month period beginning at any time during the year.
- Your company’s tax treatment and filing requirements. Indicate in your Operating Agreement how your LLC has elected to be taxed. Any required filings with Georgia have to be indicated as well
Guidelines on Limitation of Liability and Indemnification
Your Operating Agreement should also contain provisions regarding members’ limitation of liability, and the indemnification of members. This is to ensure that your LLC will be able to protect the personal assets of its members. Specifically, you must include the following:
- Provisions limiting members’ and managers’ liability for the LLC’s obligations
- Details regarding the indemnification, or reimbursement, of members who act and spend personal funds on behalf of your LLC
- Insurance Requirements details
While your LLC is capable of protecting its members’ possessions, getting additional insurance means adding more coverage. Include details about insurance requirements in your Operating Agreement.
Provisions for dissolution and winding up
Your Operating Agreement has to include detailed instructions on how your company handles being dissolved. There are a variety of reasons why an LLC can shut down. These include the resignation or untimely departure of a member, a court order mandating the dissolution of your LLC following a defeat from a lawsuit, and so on. But usually, your LLC is expected to dissolve once it achieves the purpose for its formation.
Details about “winding up,” or the process of settling matters before closing your company, must be specified as well. These instruct you on how to liquidate assets, settle debts, and prepare and file tax returns with the IRS.
Guidelines for distributing the proceeds from liquidation, as well as remaining assets post-closure, must also be specified. While these are typically distributed according to interest percentage, including provisions for the matter will help you avoid or solve potential disputes should they arise.
Guidelines on Resolving Disputes
Lastly, your Operating Agreement must include instructions for dispute resolution. While the existing provisions could already prevent most conflicts from happening, there is still a possibility for misunderstandings. This could lead to disputes. Having guidelines on handling disputes ensures all issues are handled properly.
Why is an operating agreement needed?
Enforceable in Court
The terms outlined in a written LLC operating agreement is usually enforceable in a court of Law.
Opening Bank account
Certain financial institutions require you to produce an operating agreement to verify whether you have “signing power” for the LLC.
If the terms of compensation, roles, and responsibilities are mentioned in the operating agreement, it avoids disputes among LLC members in the future.
Preserve limited liability status
Especially if you are a single-member LLC, having an operating agreement helps ensure your liability status is upheld in court.
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How Much Is A Georgia LLC Operating Agreement?
Georgia does not require LLCs to have Operating Agreements before they are formed. You can form and run your company without having to create the document. That said, the Operating Agreement is a very important tool in ensuring your company performs at its best.
Creating an Operating Agreement won’t cost you anything if you create it yourself. But if you want to get professional advice from lawyers, you should prepare to spend up to $1,000 for it.
Frequently asked questions
Georgia does not require any LLC to have an Operating Agreement. This applies to single-member and multi-member LLCs. You can still create your own for use in your company, however.
No. Your company’s Operating Agreement is valid and effective for as long as your LLC exists. Compliance from your LLC’s members, however, is another concern.
Yes. Your LLC’s membership can make any changes or amendments to your Operating Agreement. Such changes, however, have to be approved by all members during meetings for the purpose.