Setting up your LLC Operating Agreement

Among the advantages of setting up your company as a limited liability company (LLC) is the simplicity of few statutory compliance requirements and the peace of mind that your personal assets are protected. Now that you’ve decided that an LLC is how you want to set up your company, you must prepare and file your articles of organization with the state that you’ve decided to establish your LLC.  In addition, you should also consider setting some internal ground rules for how you manage and run your LLC. The document that you do that is your company’s Operating Agreement.

The Operating Agreement sets forth, among other things, the manner of operation of the business; how the members of the LLC will make decisions; how the profits or losses of the LLC will be allocated.  Although some states don’t require you to have one, you should definitely consider it. An Operating Agreement provides evidence that your personal and business affairs are separate and can go a long way toward helping avoid misunderstandings, arguments, and all-out battles among business partners.

A LLC operating agreement should typically address the following points:

1. Percentage of Ownership/ Distribution of profits and losses

An Operating Agreement should indicate each members’ percentage of ownership according to the percentage of the total funds (capital contributions) they invested into the business. Although the funds invested is the primary manner of allocating percentage of ownership, that may not always be the case.  For example one of the members of the LLC may be providing labor and services to the company in exchange for ownership percentage.  Your Operating Agreement should specify the percent of ownership to make it completely clear.

LLCs offer flexibility in how you can split your business profits and losses. While often the percent of profits individual members get is directly related to ownership percentage, you might decide a different arrangement would be appropriate. Your operating agreement should spell that out, so there’s no confusion.

2. Your LLC’s Management Structure/Members’ Roles and Responsibilities

When completing your Articles of Organization, you must choose to set it up as either member-managed or manager-managed. When member-managed, the owners run the company day in and day out, actively making decisions and conducting business. If you opt to have your LLC manager-managed, you elect a manager to run the business. It’s important to specify the roles and responsibilities of your LLC’s members (and manager, if applicable), so everyone knows what they should be doing and the authority they have.

3. How Decisions Will Be Made

For decisions that require a decision by members, the Operating Agreement should specify if a majority or unanimous vote of members is required. In many states, the statutory default for voting power in LLCs is proportional to ownership percentage. If you would like a different manner you can modify it so it makes sense for your situation. 

4. What Happens If A Member Wants Out

In the event any member decides to exit the business, you need to address what will happen to their ownership interests. Having included this scenario in your LLC operating agreement will eliminate any issues when someone leaves for personal reasons or dies.  

For example, you might stipulate that if a member chooses to leave voluntarily, that member  must offer his or her ownership interest to the other members before offering their membership interest to a third party. If a member passes away, you can document that the transfer of his or her ownership interest to a third party requires approval by the other members. It is also recommended that the Operating Agreement also describe what should happen if a member files for bankruptcy or gets a divorce.  

5. What Happens If You Want to Close Your Business

The dissolution of your new business wouldn’t be on top of your mind when launching your business, but it’s wise to think about the unthinkable just in case it does become an unwelcome reality. Your Operating Agreement should include the steps that should be taken when dissolving the LLC and how your LLC’s assets should be divided after its debts are paid.

Business owners should treat their Operating Agreements as living documents. Events occur that affect your business and you should update your LLC Operating Agreement to reflect modifications in the roles of members, changes in how you’ll want profits distributed, a new business address, etc. By making sure your Operating Agreement reflects your current situation, you’ll be better prepared to handle any questions or misunderstandings that arise regarding how your company should be run.

Looking for a Will County corporate law attorney? Bretz, Flynn & Associates counsels its clients in connection with numerous formation, compliance, Regulatory, and litigation matters.  In assisting its clients, Bretz, Flynn & Associates draws upon the significant experience of its lawyers, who include the former general counsel of a broker-dealer. 

Bretz, Flynn & Associates clients tend to be entrepreneurial and range in size from family offices to large corporations.  Bretz, Flynn & Associates provides counsel at every stage, from formation through, sale, disposition or succession to later generations. Should you need any assistance to ensure your business remains successful and profitable, contact Bretz, Flynn & Associates today at (815) 740-1545 today!




Choosing Your Business Structure

Starting a business can be exhilarating, overwhelming and incredibly fulfilling. From the very beginning you are making decisions; from logo designs, marketing plans, brand colors to the formation of your business. Choosing your business structure is very important when it comes to making your first business decisions. 

Several choices are available to you, and you should keep all the advantages and disadvantages in mind. You can choose between a sole proprietorship, a partnership, a limited partnership, a limited liability company or a corporation. What is the right structure for your business? That depends on a number of factors.  Before that decision is made, you must understand the different options available to you and your business.  Let’s break it down.

First, let’s understand what defines each of these business structures.

1. General Partnership

A general partnership requires at least two partners and must be defined by a legal partnership contract. Partners, like sole-proprietors, are not employees, and personal assets and partnership assets may be at risk. When forming a general partnership, no separate income tax is paid as income passes through the individual partner's tax returns - although, a separate declaration (1065) must be produced. 

2. Limited Partnership

A limited partnership comprises of one or more limited partners and one or more general partners. A limited partner differs from a general partner in that he is personally liable only to the extent of the capital he has contributed to the company and they do not participate directly in the management of the company.

3. Limited Liability Company

A limited liability company combines the benefits of a corporation and a partnership. Like a corporation, a “LLC” becomes a separate legal entity and therefore, owners can open up a bank account, get a tax identification number and do business, all under the “LLC’s” own name. 

4. Corporation (for profit)

A Corporation is a more complex business structure. A corporation has certain rights, privileges, and liabilities beyond those of an individual. Doing business as a corporation may yield tax or financial benefits, but these can be offset by other considerations, such as increased licensing fees or decreased personal control. Corporations may be formed for profit or nonprofit purposes. 

If electing to form a for profit  corporation, one must consider in consultation with their tax professional whether to elect c or S corp status for tax purposes.

C- Corp

A C-Corp is a legal business structure in which the owners, or shareholders are taxed separately from the entity.  C-Corps also do not have any restriction on ownership and can be subject to double taxation.  


An S-Corp offers many of the same protections to its shareholders as a C-Corporation. However, revenues generated by S-Corporation through individual shareholders are returned to the company that files an income tax return without paying tax. This is true even if the company does not distribute funds to shareholders. Also, the limit for shareholders is 100 people who are US citizens or resident aliens.

5. Nonprofit Corporation

A Nonprofit Corporation is a legal entity and is typically run to further an ideal or goal rather than in the interests of profit. Many nonprofits serve the public interest, but some engage in private sector activities. Charitable activities may require additional registration. 

Choosing the right business structure is one of the most important decisions you can make in the beginning of our startup journey. Speak to a professional corporate lawyer at Bretz, Flynn, and Associates Today!

At Bretz, Flynn and Associates, we counsel our clients in connection with formation, compliance, regulatory, and litigation matters.  In assisting our clients, we draw upon the significant industry experience of our lawyers, who include the former general counsel of a broker-dealer. 

Our clients tend to be entrepreneurial and range in size from family offices to large corporations.  Bretz, Flynn & Associates provides counsel at every stage, from formation through sale, disposition or succession to later generations. 

Should you need any assistance to ensure your business remains successful and profitable, contact Bretz, Flynn & Associates today at (815) 740-1545.