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:

1. Identifying Information

  • 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

2. Money

  • 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.

3. Management

  • 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.

4. Resolution

  • 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.

Conclusion

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.

Frequently Asked Questions

  1. What Is The Purpose Of An LLC Operating Agreement?

An operating agreement is a key document used by LLCs because it outlines the business’ financial and functional decisions including rules, regulations and provisions. The purpose of the document is to govern the internal operations of the business in a way that suits the specific needs of the business owners.

  1. Do LLCs Have Operating Agreements?

Yes, LLCs have operating agreements.

  1. Is An LLC Considered Marital Property?

Yes, and even if you formed the LLC before marriage, it can become a marital property. For example, if you invested marital funds in the business or if your spouse worked in the business without compensation, a court might decide that the LLC has become a marital asset.

  1. Do You Need To File LLC An Operating Agreement?

You don’t have to. For example, even though California law requires you to have an Operating Agreement for your LLC, it doesn’t require you to file it anywhere. Your California Operating Agreement is an internal document.

  1. What Must Be Included In An LLC Operating Agreement?

The core elements of an LLC operating agreement include provisions relating to equity structure (contributions, capital accounts, allocations of profits, losses and distributions), management, voting, limitation on liability and indemnification, books and records, anti-dilution protections, if any.

  1. How Do I Find My LLC Operating Agreement?

If you’re not sure who is serving as the LLC’s registered business agent, the information is available through the Secretary of State’s office in the state where your business is registered. The same office may also have a copy of your LLC operating agreement, although filing such agreements is generally not required.

  1. Can Another Business Entity Be A Member Of An LLC?

Yes! All states allow for other types of business entities (not only individuals) to serve as members of LLCs. Generally, there are very few restrictions limiting a corporation from being an LLC member. A corporation doesn’t even have to be incorporated in the same state as the one in which the LLC is organized.

  1. What Are Articles Of Incorporation And Operating Agreements?

An operating agreement (bylaws) is an internal document that defines how the business owners professionally relate to each other, whereas the articles of incorporation (certificate of formation) is a public document that legally establishes a business as a corporation.

  1. What Is An LLC Operating Agreement And Why Do You Need One?

An operating agreement is a key document used by LLCs because it outlines the business’ financial and functional decisions including rules, regulations and provisions. You will need the document because it will help you govern the internal operations of the business in a way that suits the specific needs of the business owners.

  1. What Is The Difference Between A Partnership And An LLC?

Aside from formation requirements, the main difference between a partnership and an LLC is that partners are personally liable for any business debts of the partnership – meaning that creditors of the partnership can go after the partners’ personal assets – while members (owners) of an LLC are not personally liable

  1. When Should I Turn A Sole Proprietorship Into An LLC?

As soon as the business has even one paying client, the owner is open to liability and should create an LLC or corporation to provide legal protection. The LLC or corporation provides a separation between the business assets and the personal assets.

  1. Can I Create My Own Operating Agreement For My LLC?

Most states do not require LLCs to have this document, so many LLCs choose not to draft one. While it may not be a requirement to have an operating agreement, it’s actually in the best interest of an LLC to draft one. However, a written operating agreement defines in writing how the LLC is run.

  1. How Do You Change A Sole Proprietorship To An LLC?
  • Check your business name.
  • File articles of organization.
  • Write an LLC operating agreement.
  • Announce your LLC.
  • Apply for a new bank account.
  • Get business licenses and permits.
  1. Is An Operating Agreement Required For A Corporation?

While corporate bylaws are specific to an S-Corp or C-Corp, an Operating Agreement serves a similar purpose for LLC’s. If you haven’t incorporated your business, then creating rules of operation is not required, but it’s certainly recommended.

  1. Should A Single Member LLC Have An Operating Agreement?

Unlike the articles of organization, an operating agreement generally is not required in order to form an SMLLC, nor is it filed with the state. Instead, an operating agreement is optional—though recommended. If you choose to have one, you’ll keep it on file at your business’s official location.

  1. What Happens If An LLC Does Not Have An Operating Agreement?

If there is no operating agreement, you and the co-owners will not be suitably equipped to reach any settlements concerning misunderstandings over management and finances. Worse still, your LLC will be required to follow any of your state’s default operating conditions.

  1. How Much Does An LLC Operating Agreement Cost?

Drafting an operating agreement typically costs anywhere from $350-$1000 for a single-member operating agreement and from $750 to $5000 for a multi-member operating agreement.

  1. Does Having An LLC Help With Taxes?

LLCs give business owners significantly greater federal income tax flexibility than a sole proprietorship, partnership and other popular forms of business organization. Make sure you have a financial plan in place for your small business.

  1. What Are The Advantages Of Changing From A Sole Proprietorship To An LLC?

The main advantage of operating as a limited liability company is that there is limited liability for the sole proprietor which means the owner’s personal assets are not exposed to the risks and liabilities of their business operations.

  1. Does An LLC Need A Business Purpose?

Most states do not require you to be specific about the purpose of your LLC. Instead, a statement such as “The purpose of the Limited Liability Company is to engage in any lawful activity for which a Limited Liability Company may be organized in this state” is usually sufficient.

  1. Does LLCs Have Bylaws Or Operating Agreement?

A limited liability company (LLC) is not required to have bylaws. Bylaws, which are only relevant to businesses structured as corporations, include rules and regulations that govern a corporation’s internal management. Alternatively, LLCs create operating agreements to provide a framework for their businesses.

  1. Can Northwest Help You Create An LLC Operating Agreement For Your LLC?

Yes, Northwest can help you create an LLC operating agreement for your LLC. As a matter of fact, Northwest prides themselves on making LLCs easier to manage and their LLC operating agreements have been used to run over 1.5 million LLCs.

  1. If You Have An LLC Operating Agreement, Do You Need A Business Plan?

Having an LLC operating agreement does not stop you from having a business plan. This is because an LLC operating agreement and business plan serve different purposes.

  1. What Is The Difference Between Articles Of Organization And An Operating Agreement?

An Operating Agreement is an agreement between the Members (owners) of a Limited Liability Company. The LLC Operating Agreement is NOT the document you file when creating an LLC. The filing document for an LLC is called the Articles of Organization.

  1. Are You Required By Law To Have An Operating Agreement For Your LLC?

All LLC’s with two or more members should have an operating agreement. This document is not required for an LLC, but it’s a good idea in any case.

  1. Do You Have To Pay For LLC Every Year?

Yes, and this is due to the fact that the LLC annual fee is an ongoing fee paid to the state to keep your LLC in compliance and in good standing. It’s usually paid every 1 or 2 years, depending on the state. This fee is required, regardless of your LLC’s income or activity. Said another way: you have to pay this.

  1. What Are The Pros And Cons Of Incorporating In Delaware?

Incorporating in Delaware holds many advantages; here are the key ones: The Delaware court system is well established and highly respected. Delaware offers a lot of flexibility for structuring your corporation. Delaware offers greater privacy. Investors prefer Delaware corporations. Delaware offers some tax advantages.

  1. Do You Need A Lawyer For An Operating Agreement?

You can use online services to create an operating agreement, but you are better served by getting the help of an attorney. Your attorney can make sure all the relevant clauses are included, and he or she can tailor the document to the requirements of your state.

  1. Does A Single Member LLC Need An Operating Agreement In California?

California does not require an SMLLC to have an operating agreement. The operating agreement is usually made between the single member and the LLC itself. The agreement typically covers the member’s rights, duties, and obligations, as well as the SMLLC’s management structure.

  1. What Happens If One Member Wants Out Of The Business?

Generally, an operating agreement guides an LLC in the event a member wants to withdraw. Without an operating agreement, state law determines whether the the remaining members split or purchase the departing member’s share or the company automatically dissolves. The members may be required to notify the Secretary of State.

  1. Does An LLC Operating Agreement Need To Be Notarized?

There is no requirement that the operating agreement is notarized. Even without being notarized, the document is still considered legally enforceable among the parties. However, some businesses will still have the signatures notarized to make things “feel” more official.

  1. What Do You Do With An LLC Operating Agreement?

An operating agreement is a key document used by LLCs because it outlines the business’ financial and functional decisions including rules, regulations and provisions. The purpose of the document is to govern the internal operations of the business in a way that suits the specific needs of the business owners.

  1. Should I Use An LLC Formation Service Or Do It Myself?

It depends on what you want and if you have the money.

  1. What Is The Process Involved In Changing The Name Of An LLC?

To change an LLC name, you must amend those articles. Each state has its own amendment form. You can contact your state’s business filing agency or search “change name of LLC” on their website to find out which form you need to use in your state.

  1. Can A Single Member LLC Have Multiple Managers?

When you choose an LLC as your business entity, you have a lot of flexibility. Be it a single-member LLC or a multi-member LLC, in either case you have two options for management: member management and manager management.

  1. Can An LLC Have Multiple Owners?

The most popular types of two-members LLCs are businesses run by a husband and wife or businesses with friends as partners. A multi-member LLC can be formed in all 50 states and can have as many owners as needed unless it chooses to form as an S corporation, which would limit the number of owners to 100.

  1. Does An LLC Have Shares Of Stock Like A Corporation?

No. Only businesses structured as a corporation issue shares. With a limited liability company, ownership is expressed by percentage and membership units.

  1. Does A Husband And Wife LLC Need An Operating Agreement?

Yes, because if you share a business with your husband or wife, you should have a written agreement to protect your interests. The benefits of a husband/wife LLC are that you can file as a disregarded entity. No need to file a separate partnership return.

  1. How Much Does It Cost To Start An LLC On Legalzoom?

The cost of forming a LegalZoom LLC ranges from $79 to $359 plus filing fees. Other websites provide similar services for filing fees only (as part of a trial) or from $49 plus filing fees.

  1. Can An LLC Be Formed Without Listing The Member On The Articles Of Organization?

Many states do require that the members of the LLC are listed within the articles of organization while other states only collect minimal information and do not list the members of the LLC on the articles. Some states however provide the option to either list of omit the members those states are Delaware and Wyoming.

  1. Does An LLC Have To Have A Managing Member?

A limited liability company (LLC), like any other business entity, requires someone to manage its operations and affairs. However, the LLC laws of most states do not require an LLC to formally designate individuals as managers.

  1. Will The FDIC Insure Money Held By An LLC Or Corporation?

As with consumer accounts, total deposits in eligible business accounts from a corporation, partnership, LLC or unincorporated organization at a bank are covered up to $250,000.

  1. How Do You Prove Licensure When Forming A NY Professional Entity?

This can be verification from the licensing authority website or a copy of their license or registration. Proof of licensure and current registration in New York for at least one of the shareholders, officers and/or directors, and a completed Professional Corporations Corporate Contact Information Form.

  1. How Is LLC Ownership Divided?

Members usually receive ownership percentages in proportion to their contributions of capital, but LLC members are free to divide up ownership in any way they wish.

  1. Can I Use My Residential Address For Business?

While it is perfectly legal to use your home address as your Registered Office Address at the time of your company formation, you may decide at some point in the future to change your registered address or any of your other business-related official addresses, such as your Service Address.

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