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Operating Agreement
A legal document that defines the ownership structure, roles, and rules of an LLC.
Definition
An operating agreement is the governing document of an LLC that establishes the rights, responsibilities, and profit-sharing arrangements of its members. It defines ownership percentages, capital contributions, management authority, decision-making processes, profit distributions, and what happens when a member wants to exit or the LLC is dissolved. Even single-member LLCs benefit from an operating agreement because it reinforces the legal separation between the individual and the entity. Lenders typically require a copy of the operating agreement when financing a property owned by an LLC. A well-drafted operating agreement is essential for protecting all parties involved.
How This Relates to DSCR Loans
DSCR lenders require the LLC operating agreement during underwriting to verify authorized signers and confirm the entity structure.
Related Terms
LLC
A Limited Liability Company — a business structure that separates personal assets from investment property liability.
Joint Venture
A partnership between two or more parties to jointly invest in a specific real estate deal.
Entity Vesting
Taking title to a property in the name of a business entity like an LLC or trust instead of a personal name.
Asset Protection
Legal strategies to shield personal assets from lawsuits, creditors, and liabilities arising from investment properties.
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