The state of Michigan does not require your company to establish a Limited Liability Company (LLC) agreement. However, many companies establish them as part of their business formation due to their effectiveness as a governing tool.
Purpose of an LLC agreement
Although business law does not require you to include specific information in your LLC agreement, many business owners keep specific goals in mind when creating one. These goals typically include:
- Identifying the company
- Specifying ownership percentages
- Stating member rights and responsibilities
- Describing procedural regulations
Adding legitimacy
Unlike corporations, you may form an LLC relatively easily. By deciding to create an LLC agreement, you provide proof that your LLC takes itself seriously as a business and understands the operational steps needed to succeed.
Legal status of agreements
The LLC agreement legally binds the members to its details. If a member violates the agreement, other members may pursue legal action against them for violating the contract.
Single-member LLCs
A single-member LLC operates with only the owner as a member. Although most LLC agreements involve multiple members, an operating agreement greatly benefits most single-member LLCs for the following reasons:
- It reduces your liability.
- The agreement prevents your state’s default LLC rules from taking over.
- Investors may want one as proof of your LLC.
Information to include
Since the state and federal government does not regulate LLC agreements, the members maintain some independence in deciding what to include. However, a well-written LLC operating agreement should mention the following:
- Voting procedures
- Allocations of profits and losses among members
- Dissolution plans
- Member retirement
- Transferring procedures
- Succession procedures
Protecting the LLC
Ultimately, the LLC agreement protects the company and its members from spending time in court trying to solve differences. As a legally binding document, a well-written LLC operating agreement may prevent legal battles that could otherwise last for years.