New business statistics from the United States Census Bureau show that in August 2021 alone, more than 427,842 new business applications were filed in the US. But to set a startup up for success, and to remain legally compliant in some states, entrepreneurs should note that a specific type of business requires an operating model.
An operating agreement is a legal document which outlines the ownership and member duties of the business. This agreement also allows owners to set out the financial and working relations among business owners, members and managers. Operating agreements should contain six key sections, namely Organization, Management and Voting, Capital Contributions, Distributions, Membership Changes, and Dissolution. Business owners should also note that the operating agreement can be updated at any time through a process of their choice.
This article will explore the business model that requires an operating model.
Although not all states legally require an operating agreement, limited liability companies (LLC) in California, Delaware, Maine, Missouri, Nebraska, and New York are legally required to have an operating agreement. An LLC is a business model that acts to protect business owners from being personally liable for the debts and/or other liabilities of the business. An LLC, which is a hybrid entity that combines the benefits of a partnership and sole proprietorship structures, is able to be owned by one person, but also by multiple people. LLCs are pass-through entities which means that the profits and losses from the LLC are taxed as personal income by the owner/owners. LLCs also have the option of choosing to be taxed as a C corporation or an S corporation.
LLCs offer a multitude of benefits, as well as a few disadvantages. The main benefits are personal asset protection and pass-through taxation. It also offers simplicity because LLCs are easy to create and maintain, flexibility because of the little restrictions on the structure, ownership and management, as well as credibility because an LLC is a widely recognized business structure that reassures customers and clients. LLC’s additionally allow businesses access to business loans because of credit that is able to be built as well as flexible profit distribution among multiple owners.
LLC formation in the US is simple, but the process does differ across states. There are general steps every entrepreneur will have to follow if forming an LLC, such as:
- Selecting a State
The first step is selecting the state in which the LLC will operate. Most business owners will decide to start the LLC in the state where they live or where the business is located. If the business has other branches in other states, they would be required to start a foreign register in each state where the business is located.
- Naming the LLC
The general guidelines are that the name should include the phrase “limited liability company” or the abbreviation, the name cannot include words that are related to a government agency, and if it uses restricted words, like “bank,” “attorney” or “university”, it may require additional paperwork and the inclusion of a licensed individual.
- Choose a Registered Agent
LLCs need to choose a registered agent, which is a person or business designated to send and receive legal documents, such as legal summons and document filings, on behalf of the LLC.
- Filing the Articles of Organization
The following step would be to register the LLC with the state. Along with the articles of organization, LLCs would need to provide:
- Full names and contact information for all founding members
- Business name
- Business address
- Length of time the company has existed
- Registered agent’s information
- Information about the LLC, a mission statement and explanation of purpose
- Create an Operating Agreement
- Obtain an EIN
Business owners would then have to apply to the IRS for an employer identification number (EIN). This would be used on bank accounts as well as income and employment tax filings.
- Business Bank Account
When forming an LLC, it is imperative to separate the businesses finances from the owners’ personal finances. The owners may be held liable for the LLCs debts if the business does not have a business bank account.
The Bottom Line
Given the many benefits of an LLC, providing flexibility and being beneficial from a tax standpoint, starting an LLC as a startup may be a smart step towards business success. To work towards success, LLC owners should form an operating agreement. They would also have to do so in California, Delaware, Maine, Missouri, Nebraska, and New York to remain legally compliant. The Really Useful Information Company (TRUiC) is able to assist entrepreneurs in creating a free, custom operating agreement.