How To Know What’s Wrong With Your LLC Operating Agreement And How To Fix The Issues You Have?

When it comes to limited liability companies, it’s of significant importance that you make a stable and good LLC operating agreement. You shouldn’t take any chances if things don’t work out as you thought they would. The agreement will help you resolve any incoming potential issues. To protect yourself and your LLC, you should pre-set the rules for “what if” scenarios in the agreement.

The Common Mistakes About LLC Operating Agreement

Many people still don’t know the importance of the limited liability company operating agreement. The agreement will set the ground rules. It will help with managing the company, but it also serves as a potential dispute resolving tool. No one likes to think that conflicts may occur, but the smartest thing to do is to protect yourself and your company up front. To create this agreement, you can use the operating agreement template or create a new one. The most important thing to do is to make sure that everybody signs this agreement. That way, the LLC operating agreement becomes legally binding.

How Can This Agreement Help with Taxes?

The operating agreement is a crucial tool to establish your tax status successfully. If you’re a sole proprietorship, you will be taxed as a corporation or as an individual. In case you have more than one member, there are two possible options – taxed as a partnership or as a corporation. The thing you need to know is that the provisions of your simple operating agreement need to match with the tax designation.

Words Are Important

To be able to create an understandable LLC operating agreement, you must pay close attention to terminology. Some common mistakes include referring to LLC members’ “operating interests,” while each member has a single membership interest. The correct term to use would be “a limited liability company interest.”

The difference between distributions and allocation is another example of a mistake that a lawyer may have. The allocation comes from the company’s losses and income, while distribution comes from contributed capital or earnings.

Yet another mistake people tend to make is the situation when they need to distinguish who is a member and who is an employee. This area of law is a tricky one, and usually, these two roles can overlap. Members usually try to designate themselves as employees. Tax laws clearly state that you can choose to be one or another. You should make sure that your operating agreement is very clear on this subject.

Think About the Bankruptcy

Talking about bankruptcy is not something that people are willing to do. That is why your LLC operating agreement must include contractual obligations with material business purposes. It should apply to any member or a creditor or even a trustee who will take over the member’s interest.

Updates and Upgrades of The Agreement

When people create solid operating agreements, they tend to think that there’s no need for updates. When changes to tax status, members, and buy-sell contracts occur, the agreement that wasn’t updated can cause all kinds of trouble.

Include Everything You Think Of

What every operating agreement should have are all the details regarding your company. This is one of the crucial elements of the agreement, and people tend to fail to comply. The agreement must include all the details about the managerial roles, voting rules, what will happen if the expected contributions fail, procedures on cashing out members, dissolution of the company, and much more. It’s for the best to put as many details as possible into the agreement. A solid operating agreement will help you avoid headaches in the future.

You should consider everything said, and create an ironclad operating agreement for your LLC. Even if there’s only one member besides you in your operating agreement, you’d want to save yourself from bankruptcy, taxes, and creditors. Give us a call at (305) 921-0440 if you need further explanations about the LLC operating agreement or contact us via email at Romy@jflawfirm.com.

Origibally published in: