Did you form a limited liability company (LLC) for your ecommerce business? If you chose this entity formation, you might be wondering if you should also draft an LLC operating agreement.
Some entrepreneurs choose not to create an operating agreement because many states don't require LLCs to have one. However, it’s helpful to have a written agreement at the ready for a variety of reasons. Let’s explore what it means to draft this document and what should go into your LLC’s operating agreement.
What’s An Operating Agreement?
An operating agreement is an agreement established between members of an LLC. It details how the business will be run and the rights and duties of the LLC’s members.
When all members of the LLC sign off on the document, the operating agreement acts as an official contract for the business. It solidifies the business structure and purpose.
From here on out, the members (or owners) may refer to their LLC’s operating agreement for information regarding the financial and functional 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 pretty easy to create for an ecommerce LLC, and only needs to cover a few key areas.
This section covers ownership rights among all members of the LLC. It also details how profits, losses, and assets are divided accordingly.
For example, let’s say that your ecommerce LLC only has one member (or owner). All profits, losses, and assets belong to that member by default. However, if you have another member or partner that has invested equal amounts into the company, the LLC’s ownership is split 50/50.
What if there are even more members of the LLC, but not all members invested equally into the LLC? A discussion must be held to determine what percentage of ownership each member will receive, and the final details noted in the operating agreement.
2. Members’ Rights and Responsibilities
The members of the LLC, and their basic information, must be included in an operating agreement.
General background biographies aside, the LLC’s operating agreement must also detail the role each member has in the company. What does each member do within the company, whether they’re leading human resources or providing IT support? What are their duties and expectations in their positions?
This section must also cover the rights of the LLC’s members. Additional details should be included about how much influence a member has in making decisions for the business as well as how to resolve disputes among members.
3. Joining and Leaving the LLC
What does the protocol look like for members that would like to join the LLC, or exit the ecommerce company? The operating agreement will outline additional information for new and existing members in the LLC.
Consider the following details:
- Joining the LLC: What are the rights and responsibilities of new members? Will their initial investment determine their percentage of ownership in the LLC? Do new members receive anything else for joining the ecommerce LLC?
- Leaving the LLC: What does the member receive before they leave? Will they be able to remain involved with the business? What if the member exiting is the LLC’s only member, or there is an unexpected passing of a member? Will the business need to file for a dissolution and close its doors?
What Makes An Operating Agreement Valuable?
Since it’s not a requirement by most states, some small businesses decide that in place of a written operating agreement, they will establish an oral operating agreement instead. If there’s no record of this conversation, however, it’s difficult to determine who said what and subsequently who owns what and has which responsibility.
When in doubt, write it out! Drafting an operating agreement may not be a requirement; however, having a written agreement ready and in place helps to protect your assets and interest in the company over time.
Best of all, this document doesn’t need to be filed with the state. You may draft it in-house within the company and have it ready to go quickly. Create a few extra copies—you never know when you might need the operating agreement handy!