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Drafting LLC Operating Agreements

Drafting LLC Operating Agreements

Limited liability company (LLC) operating agreements are much like corporate bylaws in that both types of documents govern the workings of your business.

LLC operating agreements allow the owners of a business to configure the running of their business in a way that best suits their needs. Normally, an operating agreement for an LLC will lay out various key points, such as each co-owner’s percentage ownership share of the business. In addition, LLC operating agreements lay out the share of profits – or losses – that each owner will receive, the rights and responsibilities of the owners, and typically also detail what will happen to the business if one of the owners leaves.

Why You Need an Operating Agreement For Your LLC

Depending upon the state that you are running your business in, you may or may not be required by law to write out an operating agreement for your limited liability company. However, even if you state does not require it, it is still a good idea to make an operating agreement for your LLC.
By having an operating agreement for your LLC in place, you have a line of protection that guards the status of your limited personal liability for your business’ dealings, and can also avoid or alleviate misunderstandings between owners of the LLC. Having an operating agreement in place can protect this status when and if courts begin looking at your assets to satisfy an obligation of your business. Lastly, each state has default laws you may want to avoid that will govern the running of your LLC if you choose not to make an operating agreement.

Ownership and Management in Your Utah LLC

If you are a part owner of an LLC that has multiple owners, you will want to ensure that the operating agreement for your LLC lays out the profit- (and loss-) sharing breakdown between all of the owners. In addition, the operating agreement should also clearly define the managerial structures, laying out procedures for decision making about the business as well as what will happen in the event that one of the owners decides to leave the business. If your LLC does not have an operating agreement in place that takes care of these two issues, you may run into problems when your business makes record profits for a year, or when your long-term business partner decides to leave.

Default Rules for Utah LLCs

Many states have default rules that say that losses and profits should be divided equally among all the owners of the LLC, regardless of their respective ownership interests. However, you can avoid this default rule by agreeing that the share of losses and profits will be split according to the percentage ownership of each member.

Have These Provisions In Your LLC Operating Agreement

Although each LLC operating agreement will probably be a little different, depending upon the needs of each business, there are few essential terms that are contained in a majority of operating agreements. These terms include:
• A breakdown of the ownership percentage of each member;
• The rights and responsibilities of the members;
• A detailed plan showing how losses and profits will be distributed;
• The voting rights of members;
• A management plan for the business;
• Rules for meetings and voting; and
• Buyout or buy-sell rules that govern when a member’s sale of an interest, or a member’s death or disability.

Ownership Percentage For Utah LLC

Most of the time, the ownership percentage is determined by the amount a member gave at the start of the business compared to the total amount given by all members. If you choose to do so, however, you do not have to follow this ownership percentage scheme and can allocate the ownership of the LLC in any way you wish so long as you include the scheme in your operating agreement.

Profits and Losses in Utah LLCs are sometimes called the distributive shares. Under most LLC operating agreements, a member’s distributive share is often just a simple calculation under their ownership percentage.

You may also want to make some special arrangements within the operating agreement that deal with unique situations. The operating agreement should dictate how much of the distributive share a member is allowed to take each year.

The LLC operating agreement for your business should lay out details about meetings and voting rights. In general, there are two voting rights schemes that LLCs commonly use. The first is where each member votes his or her membership percentage. Under this scheme, a person with a 40 percent ownership share has a much larger voting power than a person that only has a 1 percent ownership share. The other option is where each member gets one vote, no matter the size of their ownership shares.

Your Utah LLC’s operating agreement should also lay out the procedures required for transitions of ownership. Often, operating agreements have different procedures for this depending upon the circumstances (such as death, selling, disablement, etc). Most often, operating agreements include simple buyout schemes that allow continuing owners to buy out the ownership share of a member that is leaving the company.

Utah LLC Attorney Free Consultation

When you need legal help with your LLC operating agreement in Utah, please call Ascent Law for your free consultation (801) 676-5506. We want to help you.

Michael R. Anderson, JD

Ascent Law LLC
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506