Have you created a limited liability company (SARL) for your e-commerce business? If you have chosen this entity creation, you may be wondering if you also need to draft an LLC operating agreement.
Some entrepreneurs choose not to create an operating agreement because many states do not require LLCs to have one. However, it is helpful to have a written agreement on hand for a variety of reasons. Let’s explore what it means to draft this document and what should be in your LLC’s operating agreement.
What is an operating agreement?
An operating agreement is an agreement established between the members of an LLC. It details how the business will be managed as well as the rights and duties of the members of the LLC.
When all members of the LLC sign the document, the operating agreement serves as the official contract for the business. This solidifies the structure and purpose of the company.
From now on, members (or owners) can refer to their LLC’s operating agreement for information regarding the financial and operational decisions of the business.
3 Areas to Cover in an Operating Agreement
Don’t feel intimidated by the idea of drafting an operating agreement. This document is actually quite easy to create for an e-commerce LLC and only needs to cover a few key areas.
1. Ownership
This section covers ownership rights between all members of the LLC. It also details how profits, losses and assets are distributed accordingly.
For example, let’s say your e-commerce LLC only has one member (or owner). All profits, losses and assets belong by default to that member. However, if you have another member or partner who has invested equal amounts in the business, ownership of the LLC is split 50/50.
What happens if there are even more members of the LLC, but not all members invest equally in the LLC? A discussion should take place to determine the percentage of ownership each member will receive and the final details noted in the operating agreement.
2. Rights and responsibilities of members
The members of the LLC and their basic information must be included in a operating agreement.
In addition to general biographies, the LLC operating agreement should also detail each member’s role in the business. What does each member do within the company, whether they are leading human resources or providing IT support? What are their duties and expectations in their position?
This section should also cover the rights of members of the LLC. Additional details should be included on a member’s influence in making decisions about the business as well as how to resolve disputes between members.
3. Joining and leaving the LLC
What does the protocol look like for members who want to join the LLC or leave the e-commerce company? The operating agreement will outline additional information for new and existing members of the LLC.
Consider the following details:
- Join the SARL: What are the rights and responsibilities of new members? Will their initial investment determine their ownership percentage in the LLC? Do new members get anything else when joining the eCommerce LLC?
- Leave the SARL: What does the member receive before leaving? Will they be able to stay involved in the business? What happens if the departing member is the only member of the LLC or there is an unexpected death of a member? Will the company have to file a request for dissolution and close its doors?
What makes an operating agreement valuable?
Since this is not a requirement of most states, some small businesses decide that in lieu of a written operating agreement, they will instead establish an oral operating agreement. However, if there is no record of this conversation, it is difficult to determine who said what and, subsequently, who owns what and has what responsibility.
When in doubt, write it down! Drafting an operating agreement may not be a requirement; however, having a written agreement ready and in place helps protect your assets and interests in the business over time.
Best of all, this document does not need to be filed with the state. You can write it internally within the company and prepare it quickly. Create a few extra copies: you never know when you might need the operating agreement at your fingertips!