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Key contract for an LLC: the operating agreement

On Behalf of | Jun 22, 2020 | Business Law

New York entrepreneurs and startup principals are not strapped for options when it comes to the entity type they select for their new enterprises.

Candidly, there are lots of options, ranging from corporate form to sole proprietorship. We note that, “Choosing the correct business entity and organizational structure is key to getting your business off to a good start.”

We underscore on our website that limited liability companies emerge as favored formation choices for many business players.

Why an LLC is often a preferred entity choice

Limited liability partnerships are popular business vehicles for a number of reasons, including these:

  • Ownership generally confined to a small pool of participants, enabling flexible management
  • Legal establishment a relatively simple process
  • Partners safeguarded against personal liability to the LLC
  • “pass-through” tax treatment to members avoids double taxation

The key role played by an operating agreement in an LLC

Carefully drafting and executing an operating agreement is a foundational matter for LLC participants. An online overview of that contract notes that it importantly “governs the internal operations of the business in a way that suits the specific needs of the business owners.”

That primer also stresses these two key points: Personal liability protection can be jeopardized absent the formality of contract execution, and state rules/procedures will step in to govern an LCC if an operating agreement does not exist to manage the process.

Operating agreements can be impressively tailored and address wide-ranging matters ranging from voting rights, partners’ duties and ownership percentages to meeting specifics, profit/loss distribution and more.

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