One of the most important components of the corporate documents of a Limited Liability Corporation or LLC is the “operating agreement.” The operating agreement is a contract between the owner members of an LLC, and establishes many important agreements and procedures that govern the life of the company. The operating agreement for an LLC establishes the roles and responsibilities of each party, as well as the voting share or control each member shall hold.

The operating agreement should clearly establish the process for defining “profit” and how profits are to be distributed between the members of the LLC. The operating agreement is an important component of the “corporate veil” – the corporate protections that separate the member owners as individuals from the LLC as an entity from a liability perspective.

The operating agreement should provide protections against commingling of funds or assets, while anticipating the types of events that could challenge the survival of the business. It is important to discuss these situations up front, at the time the LLC is being established, so that clear agreements and guidance can be established while all the parties are working together and excited about the new venture. It is much more challenging and expensive to resolve disputes between member owners once they arise, and an effective operating agreement should anticipate as many of those potential challenges as possible and address how they will be handled.