1. What is an LLC Operating Agreement?
2. Why You Need an Operating Agreement for Your LLC
3. Pre–Formation Agreements and Formation
4. Default Rulings

A DC LLC operating agreement is a business document that's legally binding and defines how a company is managed, what ownership its members have, and what the limited liability company (LLC)'s structure is. There aren't set criteria for what should be in an operating agreement, but overall it should be comprehensive, transparent, and clear.

What is an LLC Operating Agreement?

There are some provision that are recommended to include in an LLC operating agreement:

  • Ownership contributions and percentages
  • Member responsibilities and rights
  • Management system
  • Voting rights and procedures
  • Allocation of losses and profits
  • Distributions
  • Sellout and buyout provisions
  • Disability, death, and ownership changes provisions
  • Amendments and dissolution

If you're the only owner of the LLC, you can form a single-member LLC operating agreement. If there are multiple members, you can select the multi-member LLC operating agreement. You don't have to submit your operating agreement to a government office, like the Secretary of State's Office, but that is required with the articles of organization. In the District of Columbia, an LLC operating agreement isn't required but is advised.

You should include all of the members' names and signatures, what their capital contributions and percentage interests are, and when the annual meetings are held. Once this is finished, give each member a copy to keep in a safe place.

Why You Need an Operating Agreement for Your LLC

An LLC is a type of business structure that has both the benefits of a corporation and a partnership (or a sole proprietorship). Similar to a corporation, having a status as an LLC keeps business owners safe against personal liability in case there are business debts to settle. Another benefit of an LLC is it allows the company to have pass-through taxation, which normally only partnerships and sole proprietorships have. The tax and liability benefits are huge, often making an LLC what most people prefer when they form a business.

However, most owners think all they need to do is file the articles of organization and don't see the importance of having a solid operating agreement for their business. An operating agreement that's well-defined is necessary to protect a business owner from being personally liable for any debts of the business. This agreement will strengthen their limited liability so all their personal assets stay safeguarded. It defines all procedures that govern the financial operations and prevents misunderstandings among the LLC members.

The financial situations of members in the LLC can differ, such as initially contributing different amounts, so the agreement must also define the timing and amount of distributions given to members. The agreement will keep the limited liability status by allowing the business to be treated as a separate entity, which is particularly essential for LLCs that are single-member. Not having an operating agreement, or one that's overly broad, won't protect the owners from any personal liability if the court decides to turn to business owners in order for the business obligations to be satisfied.

Pre–Formation Agreements and Formation

Before an LLC is created, the people who want to be the initial members of the LLC can conclude the terms and conditions as well as provisions for the operating agreement. They should agree that these will be in the operating agreement once the LLC gets formed.

Default Rulings

The Revised Uniform Limited Liability Company Act (RULLCA) is a default statue. If members haven't agreed on a certain issue, then the RULLCA will take over and regulate the issue. The agreement or part of it may be in a record, implied, recorded, or oral. It can also be a combination of these. The District of Columbia, Minnesota, Wisconsin, and New York all make it necessary that an operating agreement is written for it to be enforceable.

The main difference between the RULLCA and the old Title 29 is not requiring for the agreement to be in writing. This went into effect on January 1, 2012, and stated that any provision of the agreement or the operating agreement that's oral will be presumptively enforceable. If the agreement is within the statue of frauds, the agreement needs to be in writing or on a record.

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