An operating agreement is a legally binding agreement between the owners (a.k.a. members) of an LLC. Its equivalent for a partnership is called a partnership agreement. The purpose of the operating agreement is to define, among other things, how the LLC will be classified for tax purposes, how it will operate, what its relationship is to its members and managers, and the relationship of the members and managers one to another in their capacity as such. Because of the nature of LLC laws, where most ‘default provisions’ of the law may be specifically overridden by an operating agreement, an operating agreement may be drafted in almost any manner conceivable.
A well-drafted operating agreement will codify members’ and managers’ responsibilities so as to promote efficient business operation and avoid conflict.
An operating agreement is also extremely important in an asset protection program. It is arguably the most critical and complex component of such a program. Indeed, many of the most cutting-edge asset protection strategies, which include entanglement theory, executory contracts, kinetic asset protection, and equity stripping via LLC capitalization (which is described in PF Shield’s article Equity Stripping: The Good, the Bad, and the Ugly, are implemented via the operating agreements of an LLC or LP.
Various asset protection related court cases have examined operating agreements in great detail, and in some of these cases the asset protection program sunk or swam largely because of the agreement’s content. (For example, see In re: Ehmann, 2005 WL 78921 (Bankr.D.Ariz. 01/13/2005)