What is the Purpose of an Operating Agreement?
See the blog post, “why spend time and money to obtain an operating agreement for your limited liability company (LLC)?” for more a detailed explanation of how business operators and owners gain control over a business by creating an operating agreement for their LLC’s.
Essentially the main purpose of an operating agreement in a Massachusetts LLC is to detail the degree of control over operations of the business between present and future members of the LLC, to establish any terms of the agreement between present and future members of the LLC, and to discuss the termination or winding down of the LLC. By thoroughly defining and establishing the aforementioned aspects of an LLC, business owners develop a solid foundation for the operational success of the business and, perhaps more importantly, may establish an early defense against a form of liability known as veil piercing which allows a court to reach the personal assets of the owners or managers of an LLC.
The Structure of the Operating Agreement
Setting up Capital Accounts
An LLC will need to establish in its operating agreement precisely how the capital account of a member will be maintained in accordance with federal regulations.
LLC Members
The ownership interest of LLC members may take different forms under the Massachusetts Limited Liability Company Act, and these forms, or classes, will be spelled out in the operating agreement. Additionally, a business owner may wish to develop conditions which limit a member’s involvement in the LLC. For example, a member who falls out of standing with the LLC may have to pay a fine or even relinquish specific rights as a member, or even give up ownership rights as a result of certain conduct specified in the operating agreement.
Authority of LLC members will need to be further described in the operating agreement. Is the member allowed to make purchases on behalf of the Massachusetts LLC? Is the member allowed to enter into contractual agreements on behalf of the Massachusetts LLC, or is the member required to obtain a consensus from all members prior to entering into a contract on behalf of the company? These questions are but a few examples of the types of issues that the operating agreement, properly drafted, can resolve. The LLC operating agreement will also indicate how members are paid, how competition by a member against the LLC is defined and what restrictions exist on that member to prevent engaging in competitive activity, etc.
Management Structure and Operational Aspects of Management
The LLC operating agreement may, although is not required to, elect officers, managers, committee members, and the explain the timing and notice requirements of any such committees. Sometimes an LLC will choose to make provisions describing the issues previously mentioned to support the perception that the company operates with a strong foundation. However, once applied, strict compliance with these established rules is essential.
Division of Property Rights
Once established, a successful business will typically begin to obtain investment property, other types of property, or may already possess intellectual property that it wishes to protect in some fashion. Issues surrounding the disposition of real, personal, or other property ought to be fleshed out in the operating agreement to avoid litigation over such issues in the future.
Indemnification Clause
The LLC operating agreement will likely contain a clause which seeks to indemnify, or remove the liability of members of the LLC for the actions of a member taken in behalf of the LLC which result in a lawsuit. The indemnification clause in this context seeks to create a layer of protection for the individual member of the LLC by redirecting liability caused by the actions of a member toward the LLC itself, rather than to that specific member. On the other hand, it is possible that the actions of a member could be so outrageously negligent that the member would not be able to escape some amount of liability for his or her actions. Still, the indemnification clause is an important method of providing this basic layer of liability protection.
The issues described in this article are but a few of the provisions that will be found in an operating agreement for a Massachusetts LLC. Certainly, an attorney familiar with the issues that arise in litigation and general issues of business law will be able to successfully craft an operating agreement for your Massachusetts LLC in a manner providing the best possible liability protection and which guides your business operations now and in the future.
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