Are you about starting an LLC and you need help to draft an LLC operating agreement? If YES, here is a sample LLC operating agreement template to help you.
Although an LLC agreement is not needed in any state in the United States, it is still a vital document. However, what is an LLC operating agreement? Is it like every other business document?
What is an LLC Operating Agreement?
Well for starters, an LLC operating agreement is a legal document that oversees a Limited Liability Company. An LLC operating Agreement throws light on the operation pattern of the company as well as the rights and obligations of members. An LLC operating agreement is similar to what the shareholder’s agreement is to a company.
Before we go further, we would like to make something clear. Articles of Organization is different from an LLC agreement. While an LLC oversees your company, Articles of Organization contains information like ownership of the LLC, who manages it, how profits are disbursed and how present or future problems of the LLC will be resolved.
It is essential to know that an LLC operating agreement may not be needed for a single member Limited Liability Company. However, it is must-have if you are considering a multiple member Limited Liability Company.
Why You Should Have an Operating Agreement
In some states, like New York and California, an LLC operating agreement is mandatory. Sometimes, this document is only needed if the LLC has multiple members. Regardless it is not required by law; an LLC operating agreement performs three other vital functions:
It permits you to govern your business. In a situation where a Limited Liability Company has no operating agreement, default rules (state laws) control several parts of the LLC. In other words, state laws substitute as an operating agreement. For example, some state laws provide that the profits of the company should be shared equally among members, regardless of the amount of capital a member contributed.
It secures the limited liability aspect of an LLC. In a case where an LLC operating agreement is absent, owners may be subject to personal liability, especially if it seems like they are running a partnership or sole proprietorship. A well written operating agreement gives members a clear understanding of the details of a business, thus reducing misunderstanding and disputes.
States That Require LLC Operating Agreement
There are five states in the United States where it is compulsory for every LLC to make an Operating Agreement and keep them among their business documents. These states include:
- New York: In New York, it is mandatory for your LLC to have a well-written operating agreement. It must relate to the business of your LLC, the right, responsibilities, and limitations of its members.
- California: LLCs in California are required to have a written or oral operating agreement. If it is written, it should be stored with the business’ record.
- Maine: In Maine, every LLC must make an operating agreement before or after filing for an LLC. The Operating agreement can be oral or written, and like the above-listed state, it must be kept among the company records.
- Missouri: Similar to New York, LLCs in Missouri can create a written or oral operating agreement. The document should entail how the business will be conducted, the affairs of the company and the duties of members, employees, and managers.
- Delaware: Just like Maine, it is mandatory for LLCs in Delaware to create an operating agreement before or after the period of filling for an LLC. The agreement can be written or oral.
Understanding the Existing LLC Variation
- Single Member Vs Multiple Member
A single member LLC is owned/operated by one person; on the other hand, a multiple member LLC is owned by two or more person. The operating agreement for a single member LLC is simple than that of a multiple member LLC. Instead of being taxed as a company, a single member LLC can be taxed as a sole proprietorship while a multiple member LLC may choose to be taxed as a partnership.
- Member-Managed vs Manager-managed
A multiple member LLC may be established so that all the members have equal authority to run the daily activities of the business, also known as member managed. If it is the management committee or a manager that handles the day-to-day operation, it is known as manager-managed
Necessary Components of an LLC Operating Agreement
Whether it is a single member or multiple members, an operating agreement for LLC business in the United States usually include the following:
- Name Of The LLC: First off, you will have to provide the official name of the business. After providing the official name, you won’t need to mention it in your operating agreement. Instead, you will make use of “The Company” when referring to it
- Term Of The Agreement: State how many years the agreement will be active. The common term to use is “indefinitely.”
- Principal Address: Include the addresses as well as where the primary office will be situated.
- Member Information: This part is pretty straightforward; make sure to input the complete name and address of every member of the LLC
- Liability: This will usually be the language that takes away liability from individual members and onto the Limited Liability Company as a whole.
- New Members: States out the process/ procedure a new person will take to buy into the LLC.
- Rights & Responsibilities of Members: Outline the rights and duties of the LLC members
- Raising Funds: Discuss how capital will be raised; typically this will be inputted next to the New Member section, since raising funds is the primary reason for getting new members
- Withdrawal and Transfer of Interest: Understandably, state the process by which members can withdraw from the LLC.
- Distribution: Specify the process for distributing profits. The time and amount that will be distributed to members must be included in your LLC operating agreement.
- Profit and Loss Allocation: Just as every other business entities, there would be profits, losses, and taxes to be allocated depending on members percentage. When it comes to an LLC, all these allocations will be discussed in the operating agreement.
- Percentage of Ownership: Just like every business entity, members usually have a percentage of the LLC depending on the percentage of what they contributed. However, that can be different in an LLC. Members of an LLC can determine ownership percentage in any way they prefer.
- Management Structure: Even though members can manage an LLC, it can also be managed by one or more managers who might not be even members of the LLC. The information concerning management structure must be indicated on your LLC operating agreement.
- Format of Operation: You will have to decide if a single or board of managers will govern the LLC. If a board of managers run it, state the number of people that will be on it.
- Managerial Qualifications: Is it mandatory for all managers to be members of the LLC? Are there any other qualifications the board wants in place? These are the questions you will answer in the section. Ensure to make your answer simple: don’t be too wordy or make the sentence complex.
- Procedure Of Election: State the process or method for electing new management to the LLC.
- Fiduciary Responsibilities: In this section, you will specify the contractual obligations of management and state level of care are they should offer.
- Powers of the Management: State the decisions management can make and which they cannot make. It is also essential to outline if there are specific requirements for some actions to be taken.
- Voting: Although many decisions in an LLC can be made informally, it is still necessary for the operating agreement to state under what circumstances voting is needed, the number of votes required for a decision, and if every member is to have a single vote or whether the voting power depends on the percentage of ownership.
- Meetings: Indicate how many times meetings will be held in a month.
- Resignation and Removal: State the procedure to be taken when a board member wants to resign, or members of the board wants him/her out. It is vital that every LLC operating agreement states what will occur when a member passes away or when a new member is added. Also, every right and obligation to buy any member ownership under certain situations should be stated.
- Mediation and Arbitration: What will be on this section may be what protects an LLC from litigation.
We have covered some of the essential things an LLC operating agreement must have. Creating one is not a difficult task; your attorney can help you create one that will cover everything about your LLC. Even though your state does not require it, investing your resources and time in an LLC operating agreement will ensure the best and smooth operation of your business for many years.