Of LLC’s and Operating Agreements

Before hanging a shingle, most business owners must decide what legal structure is right for them. This is an important choice for it has legal, tax and regulatory ramifications. Which business entity a small business owner uses, usually depends on individual circumstances, and professional help can go a long way towards figuring out the best choice.

Of LLC’s and Operating AgreementsFor example, a limited liability company (“LLC”) may be the right choice for small business owners who want to avoid the tax burden of a corporation. A LLC is generally easier to manage, avoids corporations’ double taxation, and has lesser state-mandated reporting burdens.

However, business owners must take great care to set up the LLC on the proper foundation. For example, a central component of an LLC is its operating agreement. One cannot stress enough the importance of an operating agreement. Generally speaking, operating agreements address three fundamental issues: (i) they frame the financial structure of the business, (ii) they set up the operational structure of the business, and (iii) they provide an orderly dissolution process in case the members decide to sell or terminate the business.

Indeed, once an operating agreement becomes effective, it is binding like a contract on all members. Although operating agreements vary with each business, they typically contain at least the following: percentage of members’ ownership; voting rights and responsibilities; powers and duties of members and managers; distribution of profits and loses; holding meetings; buyout and buy-sell rules.

Although some websites will offer generic, one-size-fits-all templates, small business owners who want to ensure the longevity of their business will usually hire an experienced small business attorney to draft an operating agreement that sets up the operational and financial structure, and accounts for potential legal issues.

If you are trying to decide what structure is right for your business, consider a consultation with an experienced Illinois small business attorney. At the Gierach Law Firm we have over 30 years of experience helping owners successfully navigate the challenges associated with small business ownership.

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