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Contracts & Operating Agreements


A contract is a legally binding exchange of promises or agreement between parties that the law will enforce. Contract law is based on the Latin phrase pacta sunt servanda (pacts must be kept).Breach of contract is recognised by the law and remedies can be provided. Almost everyone makes contracts every day. Sometimes written contracts are required, such as when buying a house.However, most contracts can be and are made orally, like buying a law text book, or a coffee at a shop. Contract law can be classified, as is habitual in civil law systems, as part of a general law of obligations (along with tort, unjust enrichment or restitution). 

Operating Agreement 

An operating agreement is an agreement among limited liability company ("LLC") members governing the LLC's business, and Member's financial and management rights and duties. No state requires an LLC to have an Operating agreement. LLCs operating without an operating agreement are governed by the State's default rules contained in the relevant statute and developed through state court decisions. An operating agreement is similar in function to corporate by-laws. In single member LLCs, an operating agreement is a declaration of the structure that the member has chosen for the company and sometimes used to prove in court that the LLC structure is separate from that of the individual owner and thus necessary so that the owner has documentation to prove that he or she is indeed separate from the entity itself.

An operating agreement is used to override default rules imposed by a state's LLC Act. Operating Agreements generally address: (i) member's capital and service contributions; (ii) management of the LLC (Member-Managed or Manager-Managed); (iii) buy-out provisions; (iv) voting rights; (v) managers' rights and responsibilities; (vi) distributions; (vii) tax planning; (viii) dissociation and dissolution.

Limited Liability Companies are very flexible in nature and the operating agreement defines each member or manager's rights, powers and entitlements. This includes capital accounts, membership interest, distributions of profit and allocated tax responsibility, just to name a few. This internal document is an agreement set by the company members that contains provisions for critical items and rules that run the company. Operating agreements can be amended at any time by the company members or managers. LLC's that do not have an operating agreement will be governed by state LLC law rather than what you and your business associates decide.