LLC Operating Agreement Overview
An LLC operating agreement is an agreement between the member or members of the LLC and the LLC entity itself. An operating agreement may be developed for a single-member LLC (i.e., only one owner) or a multi-member LLC (i.e., more than one owner). The single-member operating agreement effectively functions as a declaration of the operating structure the member has elected for the South Carolina limited liability company. The multi-member operating agreement is in essence the equivalent to a South Carolina partnership agreement.
Pursuant to the Uniform South Carolina Limited Liability Company Act (the “LLC Act”), the hallmark of a limited liability company is the contractual freedom members have to develop an operating agreement to regulate the affairs of the LLC and the conduct of its business, and to govern relations among its member, managers and the LLC as they deem appropriate. In general, because the LLC entity provides its members with the freedom to override and/or alter many of the statutory default rules set forth in the LLC Act via the operating agreement, there are certain mandatory rules in the LLC Act in which members should be aware. These mandatory rules are set forth in Section 33-44-103 of the LLC Act but are rarely important when developing and negotiating the LLC operating agreement.
With respect to the default rules under the LLC Act, the following are a few of the more important provisions in which members may consider overriding or modifying. First, the default rules provide that a limited liability company will be structured as a member-managed LLC, unless the member or members elect a manager-managed LLC structure. For the majority of LLC formations that our Charleston LLC lawyers handle, we elect the manager-managed structure for a variety of reasons (e.g., continuity of management, control, maximizing creditor and asset protections, among other things).
Second, the default rules provide that a single-member LLC will automatically elect the sole proprietorship tax structure. In a multi-member LLC, the default rules automatically elect a partnership tax structure. Since an LLC may be elect the tax treatment for a sole proprietorship, partnership, S-Corp, or C-Corp, these default rules are often unsuitable for may LLC owners.
Third, there are many statutory gaps in which the default rules of the LLC Act do not address which may be critical for the specific operations of the LLC or the relationship among the members. The operating agreement will effectively fill in these gaps that are not otherwise addressed by the default rules of the LLC Act.
Finally, and most important, the LLC operating agreement should be in writing if the members desire to override or modify the default rules of the LLC Act. This point is critical. Our Charleston LLC lawyers often handle matters where the members did not engage a business attorney in the LLC formation stage to properly, thoughtfully negotiate an operating agreement for the business. In good times when the business is successful and profitable, the LLC members generally are not concerned what rules govern the LLC. However, in times of conflict (or when the business is brought into a lawsuit for whatever reason), the members will wish they had spent the time to develop and negotiate an LLC operating agreement with a corporate attorney because the LLC Act’s default rules can be detrimental to the business.
Important Issues to Consider In Developing LLC Operating Agreements
Developing an LLC operating agreement for any business requires thoughtful consideration to properly address the numerous issues in connection with the LLC organization, internal affairs of the business, and the relationships among the members. The following is a brief discussion of the important issues members should address in the LLC operating agreement to ensure that the members receive the benefits afforded by the LLC entity structure.
- Standard Contract Elements
Since the operating agreement is a business agreement it must satisfy the standard contractual elements in any agreement – offer, acceptance, consideration, and clear and precise terms.
- LLC Business Organizational Issues
The operating agreement should address certain South Carolina business organization law issues, such as, member capital contributions, member allocations, member economic rights, member non-economic rights (such as voting), member or manager management structure, control issues, member dissociations, membership interest transfer issues, buy-sell provisions, etc.
- LLC Tax Treatment Issues
As noted above, the LLC may be taxable as a sole proprietorship (single-member LLC), partnership, S-Corp or C-Corp. Our Charleston corporate attorneys often review LLC operating agreement that set forth a partnership tax structure when the LLC is actually taxable as a sole proprietorship or S-Corp. Proper attention should be given to ensure the proper tax structure is provisioned in the LLC operating agreement.
- Modify the South Carolina LLC Act Default Rules
As noted above, close attention should be given in determining which default provisions in the LLC Act to override or modify.
- Addresss Issues Note Set Forth in the LLC Act
As noted above, the default rules of the LLC Act are not entirely comprehensive to address all LLC matters. If the LLC Act was perfect, there may be no need for an operating agreement. Since the LLC Act does not address specific issues and situations relevant to a business, close attention should be given to ensure those statutory gaps are covered in the operating agreement.
- Address the South Carolina LLC Act Mandatory Rules
As noted above, there are certain mandatory rules in the LLC Act in which members should be aware. These mandatory rules should be addressed when developing and negotiating the LLC operating agreement.
- Address LLC Provisions That Third Parties Will Review
Generally speaking, in the life of most ever business, the members will enter into a commercial lease agreement, take out a loan on behalf of the LLC, engage in a lawsuit, contemplate a business sale or asset acquisition, etc. In each of the situations, the third party will request to the review the LLC company agreements. The members must contemplate and address this third party issue when developing and negotiating the LLC operating agreement.
Do Single-Member LLC Need An Operating Agreement
The short answer is, yes. The LLC operating agreement will provide the sole owner with many of the same benefits as compared to a multi-member LLC. As noted above, many of the default rules of the LLC Act may be unsuitable for the sole owner of the LLC. Moreover, the default rules may not address critical legal issues specific to the operation of the business. Finally, the operating agreement can be used to address numerous issues involving third parties related or unrelated to the LLC, such as control, management and contract authority issues.
Should I Hire A Business Lawyer to Draft An LLC Operating Agreement
The short answer is, yes. Even the formation of a simple, straightforward single-member or multi-member LLC will undoubtedly involve important legal issues that should be discussed with a business lawyer. Moreover, the formation of the LLC will also involve important tax issues that should be discussed with a business accountant competent in areas of partnership and corporate taxation. Therefore, if the members forming the LLC have allocated in or around $700 – $1,500 to engage an attorney experienced in LLC organizations, it will be well worth the money. Note, legal fees may be somewhat higher if there is detailed legal and tax planning or the LLC operating agreement is significantly negotiated among the members.
Contact our Charleston LLC Lawyers
If you are seeking a Charleston LLC lawyer to develop, draft and negotiate an LLC operating agreement for your business, please contact our law firm by giving us a call, or sending one of our corporate lawyers an email. Our lawyers will respond to all inquires within one business day.