Frequently Asked Questions

What is the purpose of an operating agreement in an LLC and when should one be created?

The purpose of an operating agreement in a Limited Liability Company (LLC) is to outline the business's operating and ownership procedures. This legally binding document is crucial, especially for LLCs with more than one member. It details each member's voting rights, roles and responsibilities, the procedure for adding and/or removing members, allocation of profits and losses, each member's capital contribution, and the process for amending the original operating agreement. Although an operating agreement is not legally required to form an LLC in Massachusetts, it is highly recommended to create one. This document provides a clear framework for the business's operations and ownership, which can prevent misunderstandings and disputes among members in the future. It also provides additional legal protection by reinforcing the LLC's separate existence, which is crucial for maintaining the limited liability protection that is one of the main advantages of the LLC structure. The best time to create an operating agreement is immediately after filing the certificate of organization and obtaining the Federal Employer Identification Number (EIN). This ensures that the operating procedures and ownership structure are clear from the outset, providing a solid foundation for the business's operations. However, the operating agreement can be amended as needed to accommodate changes in the business or its ownership.