What Is An LLC Operating Agreement?
An Operating Agreement is an internal document containing the terms and conditions that LLC owners have agreed on at the start of its formation. It serves as the roadmap that can guide the company to a defined direction and a handbook containing all the guidelines needed for it to run the way you want it.
Does South Carolina require all LLCs to have an Operating Agreement?
The state of South Carolina does not require LLCs to have an Operating Agreement. However, it’s a document that can set the rules for your LLC’s internal workings and help protect your business interests. It’s always considered good business practice to have one.
What Are The Advantages Of An Operating Agreement In South Carolina?
There are certain advantages your LLC can enjoy only if it has an Operating Agreement. These include the following:
A reinforced limited liability status
An Operating Agreement acts as a document that formalizes the separation between an LLC and its members. This separation is crucial because it restricts members’ personal liabilities, meaning your personal assets stay safe from being used to cover the company’s debts and obligations.
Simplified company processes
Your Operating Agreement contains instructions that can simplify how your business is being conducted. With the document in place, all members are constantly reminded of the business’s goals and do not need to keep guessing what to do when faced with decisions that involve the company’s future.
Avoid the state’s default governing laws
As per the South Carolina Limited Liability Company Act, your LLC will be governed by default state laws if you do not have an Operating Agreement in place. Conversely, you will be able to run your company according to your rules if you have this document. Just make sure to avoid including provisions that break existing laws.
Increased credibility among investors
Investors look for certain qualities before investing in any company. These include clearly defined goals, potentially quick return on investments, and a reliable accounting system that does not allow for loopholes and unexplained losses. If these details are found in your Operating Agreement, you will have an easier time convincing people to invest in your business.
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What Are The Limitations Of An Operating Agreement In South Carolina?
No matter how effective and helpful your Operating Agreement is, it does have certain limitations preventing it from being the solution to all of your business-related concerns. Here’s a quick look at them:
It is not easy to make
Making a comprehensive Operating Agreement requires you to put in a lot of time and effort. For example, you will need to think of all kinds of concerns your company might have in the future and include provisions for them in the document. Of course, you can also hire lawyers to create one for you, should you not feel confident doing it yourself—but that’s an expense that is up to you to make.
It has to be updated regularly
Your Operating Agreement has to be updated and modified frequently so it can reflect the changes in your company’s processes. What’s more, modifying or amending provisions in the document requires the approval of all members. This process can be quite tedious, but it is necessary so the document retains its usefulness over time.
It cannot completely prevent all kinds of issues from happening.
Your Operating Agreement is able to reduce the chances of internal disputes happening in your company. However, it cannot completely prevent such arguments from ever happening. This is because the document has no control over everything, particularly external factors such as supply and demand issues.
What Should You Include In An Operating Agreement LLC In South Carolina?
To make sure that your Operating Agreement covers all aspects of business operations related to your LLC, it has to include all kinds of information about your company and its processes.
That said, the following should be indicated in your Operating Agreement:
- Details identifying your LLC
- Your LLC’s business purposes
- Your management structure
- Member roles and responsibilities
- Guidelines for membership changes
- Guidelines for scheduling meetings
- Voting mechanics
- Details about your record-keeping and financial reporting system
- Instructions for handling profits and losses
- Provisions for dispute resolution
- Amendments and severability clauses
- Instructions for dissolution and winding up
These must be as detailed as possible to avoid leaving any potential loopholes that could be exploited against your LLC’s benefit.
How To Form An Operating Agreement
Forming an Operating Agreement might be challenging, but you can create your own. Here’s what you need to do:
Details identifying your LLC
Begin by providing details about your LLC, specifically its name and business address. Follow this up with your registered agent’s. This part proves that the Operating Agreement belongs to your company. It also identifies the person who receives legal documents and interacts with South Carolina on your behalf.
Your LLC’s business purposes
Next, indicate the reasons for your LLC’s formation in South Carolina. These purpose statements serve to provide your company with a clear direction and goal. Your company’s actions must always be leaning toward achieving these purposes, or the courts could have grounds to dissolve your LLC. Make sure to specify your planned duration as well.
Your management structure
You will then need to indicate how your LLC plans to be managed. There are two management structures for LLCs: member-managed and manager-managed. Member-managed LLCs are run by their owners, who play an active role in the company’s daily operations. Meanwhile, manager-managed LLCs are run by managers selected and appointed by members.
Member roles and responsibilities
In this section, provide detailed descriptions of the roles and responsibilities assigned to each member of your LLC. These details minimize the risks of managerial misunderstanding and set expectations for everyone in the company. They also prevent members from overstepping boundaries when it comes to authority.
Guidelines for membership changes
Your Operating Agreement has to include guidelines for changes in your company’s membership. These include instructions to add new members, transferring interests to others, and withdrawing one’s ownership of the company. Be as detailed as possible to avoid confusion.
Details about your record-keeping and financial reporting system
In this section, explain in detail how your company monitors cash flow and financial transactions, keeps its records, and reports them to members. Investors will look at this section to check your credibility in handling finances.
Instructions for handling profits and losses
Next, make sure to include instructions for the proper distribution of profits and losses among members. These are typically distributed according to interest percentages, but you can amend this using your Operating Agreement. Also, include a clause stating how and when the distribution is made. Be as detailed as possible so that any confusion on this matter is removed.
Provisions for dispute resolution
Your Operating Agreement must contain guidelines for solving disputes that occur among the members or managers of your LLC. These should include instructions on how to solve conflicts internally–among concerned parties first, then with help from other members next. If the members are unable to bring a resolution to the issue, your Operating Agreement must have provisions permitting external mediation.
Amendments and severability clauses
Don’t forget to insert clauses allowing changes to be made to your LLC Operating Agreement so that it can be continuously updated to accurately reflect changes in your company. These will also allow you to remove certain provisions that are no longer enforceable, such as rules that existed before your LLC merged with other entities.
Instructions for dissolution and winding up
Lastly, make sure to provide instructions members should adhere to when the company is being dissolved, whether the decision is voluntary or not. Inserting a step-by-step process here helps your business avoid leaving unpaid debts and needing to settle matters in court, among others.
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 South Carolina LLC Operating Agreement?
Operating Agreements in South Carolina technically cost nothing since they are not required by the state. They also won’t cost you anything if you personally create one for your LLC. If the process becomes too difficult, you can hire a lawyer to help you. The professional fees cost up to $1,000.
Frequently asked questions
South Carolina does not require LLCs to have an Operating Agreement. Owners of single-member LLCs might think that they really don’t need one because of this, especially since they won’t have to sign an agreement with other members.
However, the opposite is true: Single-member LLCs benefit much from the limited liability protection that an Operating Agreement reinforces. Courts will refer to this document and use it as reference material if the LLC gets sued and loses.
No. Operating Agreements do not expire in South Carolina. However, these documents must be updated frequently so they continue to be useful to the LLC that owns them.
Yes, but only if you include provisions allowing amendments to your Operating Agreements. These proposed changes must also be presented to the members first and need to be approved by everyone before they can become valid.