United States LLC Operating Agreements
LLC operating agreements establish how a limited liability company is to be run and are equivalent to a corporation's bylaws (see Doing Business in the United States: The Laws You Should Know for more information on LLCs and corporations). In most states, including some very popular ones for forming LLCs, such as Florida, Nevada, and Wyoming, LLCs are not required to have operating agreements. Despite this, getting an operating agreement in place is generally a prudent move — and this is particularly true for an LLC with any foreign exposure.
The Benefits of an LLC Operating Agreement
1. Clarity and Protection Benefits
Properly drafted LLC operating agreements provide added clarity for its members (analogous to a corporation's shareholders) regarding their rights and obligations. By stipulating ownership stakes, management roles, and profit-sharing arrangements, operating agreements help protect the interests of its members and prevent disputes between them. And while operating agreements can help keep things civil when there are two or more members, even in the case of single-member LLCs they can make a lot of sense.
2. Legal and Financial Benefits
For one, operating agreements help establish that the LLC is a separate legal entity, and not mere alter egos for the member(s), something that can prove critical if someone tries to pierce the corporate veil. It can also facilitate dealing with banks and other institutions, among other ways by establishing the member(s)'s authority to act on behalf of the LLC. Moreover, as they outline how profits, losses, and tax items are allocated, LLC operating agreements can be a valuable tax planning tool.
3. Succession Planning Benefits
Operating agreements can also be helpful in the context of succession planning. By outlining procedures for transferring ownership interests and managing the LLC in the event of a member's death, incapacity, or withdrawal, operating agreements can provide a clear roadmap for the business's future.
4. International Benefits
For LLCs with foreign connections, LLC operating agreements can play a crucial role in aligning with international expectations. Many countries require corporate entities to have formal documents like bylaws, which outline the company's structure and governance. While American states may not require such details to be public, an LLC operating agreement can fulfill these expectations by documenting essential information, such as member identities and management roles. This helps ensure that the LLC is recognized as a legitimate entity by foreign authorities and can simplify interactions in international business dealings.
A Real-World Example
These are not theoretical concerns by any means. Our firm is currently representing a client whose mother formed an LLC in an American state to purchase a property abroad, but did not have an operating agreement drawn up. The mother passed away without making any arrangements concerning the LLC's ownership of the property. Probating the property in the country where it is located has been a major headache, which could have largely been avoided if an operating agreement was in place.
Conclusion
Having a well-drafted LLC operating agreement is essential, especially for LLCs with foreign exposure. It provides clarity on member rights and obligations, helps prevent disputes, and reinforces the LLC's status as a separate legal entity—crucial in protecting against veil-piercing. Whether your LLC has one or multiple members, an operating agreement serves as a valuable tool for legal protection, tax planning, and succession planning
While LLC operating agreements add to the costs of LLC formation, they will be worth well the money if things go south. Taking the example above, by spending a couple of thousand dollars, our client's mother could have helped ensure that her daughter would have ready access to the property in question, instead of dealing with an uncertain probate process in a foreign country.
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