LLC Agreement: Overview, definition, and example
What is LLC Agreement?
An LLC Agreement, also known as an operating agreement, is the foundational contract that governs how a limited liability company (LLC) is structured and managed. It outlines the rights, duties, ownership percentages, and internal procedures among the members (owners) of the LLC. While not always legally required, it is a critical document for multi-member LLCs and even for single-member entities in many cases.
Why is LLC Agreement important?
The LLC Agreement helps avoid disputes and misunderstandings by setting clear rules for how the business will operate. It covers issues like how profits and losses are allocated, how decisions are made, what happens if a member wants to leave, and how new members are added. Without an LLC Agreement, the company may be governed by default state laws, which may not reflect the members’ actual intentions or protect their interests.
Understanding LLC Agreement through an example
Three friends form a design studio as an LLC and draft an LLC Agreement stating that all decisions require unanimous consent and profits will be split 40/30/30 based on each person’s role and contribution. A year later, one member wants to bring in a new investor. Because the LLC Agreement requires unanimous consent for new members, the deal can’t go through unless all three agree. The agreement helps keep decision-making structured and protects the ownership rights of all members.
Example of an LLC Agreement clause
Here’s how an LLC Agreement clause may look like in a contract:
"This Limited Liability Company Agreement sets forth the terms and conditions governing the business and affairs of the Company, the rights and obligations of its Members, and the conduct of its operations. The Members agree that the provisions of this Agreement shall control, except as otherwise required by applicable law."
Conclusion
An LLC Agreement is a foundational document that defines how the business runs and how the members work together. Whether you’re starting a new venture or formalizing an existing business relationship, this agreement protects all parties involved and gives the company a clear roadmap for handling ownership, management, and growth.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.