Understanding Business Legal Structures
One of the most important decisions a small business owner will make when starting a business or purchasing an existing one is the business structure. Many small business owners opt for an LLC or limited liability company, which has some personal protection but not as much paperwork and regulation as other types of legal business structures.
One of the keys in this decision is an operating agreement. An operating agreement is an important document for an LLC—it details the business’ financial arrangements and operating decisions in the form of rules and other provisions. An operating agreement is designed to govern the internal operations of the business in a manner that is tailored to the specific needs of the business owners. Think of it as the operator’s manual for your company that acts as an official contract for the members of the LLC. When each member signs the agreement, they’re signing to be onboard for the terms on how things will work.
The agreement can discuss specific company functions, such as the percentage of each members’ ownership, voting rights and responsibilities, the authority and obligations of members and managers, and the buyout and buy-sell rules for transferring interests when the ownership changes.
In addition, an operating agreement can protect the business’ limited liability status. This will give members protection from personal liability to the LLC. Without this, your LLC may look more like a sole proprietorship or partnership, which could mean trouble and expose you to personal liability. The operating agreement also settles any oral agreements. We all know that important stuff should be in writing. Otherwise, there’s room for misunderstanding or miscommunication. Again, this owner’s manual can spell it all out.
You should also note that it’s not uncommon for third parties to ask for proof as to who owns your California LLC. The only way to prove the ownership of a California limited liability company is to review its operating agreement signed by all of its members. The names and addresses of members and managers of a California LLC that must be in its Statement of Information are unavailable to the public, and the California Secretary of State will send any requests for this type of information back to the business entity.
You should speak with an experienced business broker about your operating agreement. It’s not the best idea to operate without one… think twice before forgetting about this important document.
Your operating agreement should be kept safe along with all of your important business records. They don’t need to be filed, and the Secretary of State won’t keep a copy for you.
For more information on operating agreements and managing your business, as well as valuable tips on buying and selling a business in the Sacramento area or throughout California , please visit our website Services and choose from the drop down menu the information you’d like.
For more immediate help, please send an email to Andrew Rogerson or call our office at (916) 570-2674.
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