Starting a Business in Oklahoma Part 4: What is an operating agreement?
Limited liability companies are popular for new businesses because they can provide its members protections from liability similar to the protections of a corporation while maintaining the authority of a partnership. If you have filed articles of organization for an Oklahoma limited liability company, the next step is to consider an operating agreement.
An operating agreement can be made before or after filing the articles of organization with the state. The articles of organization create your business and include the LLCs name, address, primary email, name and address of registered agent, and term of existence. The operating agreement is not filed with the state and is not required for starting an LLC. It is a legal document that governs how the LLC will function. The operating agreement is the most important document your LLC will have because this is what will govern your company and what courts will look to if there is ever a dispute.
An operating agreement is an agreement between the members of an LLC about how the company will carry out its business. It outlines the ownership structure of the LLC and defines its business activities. The operating agreement will also outline how the LLC will be managed (by members or a manager) and how matters will be voted on. By establishing the roles of members clearly, in writing, and by agreement, later conflict and misunderstandings can be avoided. The operating agreement will also establish how the profits and losses of the LLC will be divided and how a member can buy out or be replaced if a member wants to leave. And, most importantly, the operating agreement should discuss how the LLC will end if that day comes. Dissolution of a company can be messy and expensive if the members aren’t in agreement. By agreeing at the beginning how the company should be dissolved, you and the other members can avoid future conflict at the business’s hypothetical end.
Without an operating agreement the LLC can resemble a sole proprietorship or partnership too much for tax comfort, so the document also gives members more protection by establishing it as a true LLC. If there is no operating agreement then the default state rules are called on to manage the business, so the operating agreement also allows members to govern the LLC exclusively as they see fit.
Next post we’ll discuss a corporation’s articles of incorporation- stay tuned!