Delaware LLC Agreement: Everything You Need to Know
A Delaware LLC agreement is a requirement to form and operate a limited liability company within the state. 3 min read
Delaware LLC Operating Agreement
A Delaware LLC agreement is a requirement to form and operate a limited liability company within the state. All LLCs operating in Delaware must follow the laws outlined in the Delaware Limited Liability Company Act, or Title 6, Chapter 18, of the state statutes. In other states, you might hear people refer to the agreement as the articles of organization. In Delaware, LLCs will receive a certificate of formation from the state.
Important aspects of the operating agreement for an LLC operating in Delaware include:
- Business entity formation (LLC)
- The registered agent in Delaware for service of process
- The LLC's terms and purpose
- Legal business address
- Valuation of members' interests
- Number of LLC owners (or members) and their names
- Rules around a member exit from the LLC
- How the members will receive distributions from the LLC
- A list of any managers in the LLC
You can form an LLC in Delaware when you file your certificate of formation. This is filed with the Secretary of the State. The Delaware statutes contain some of the most appealing asset protection laws for LLC owners. Something that makes the state different is the fact that the government refers to the filing document as the certificate of formation. In most other states, the document is called the articles of organization. LLC members should also produce an LLC operating agreement. This legal document outlines the procedures and guidelines to run a business.
Is an Operating Agreement Legally Required in Delaware?
Although this document is not a legal requirement within the state, it is always smart for LLC members to create an operating agreement and keep it on file with other business documents. When you complete the required form, you and any other members of your LLC will then have personal liability protection. This means that any personal property is not vulnerable if legal action is taken against the business, such as bankruptcy or litigation. Member(s) of an LLC can also take advantage of many tax benefits.
Above any other documents or contracts drafted and executed by the business, the operating agreement will become the main document above any other. In Delaware, the operating agreement of an LLC is private. You do not have to publicly file your LLC's operating agreement, nor do you have to include a list of managers and members, based on Delaware state laws.
The original document of the operating agreement should be kept safely with other company documents. Every LLC member should also receive a copy of the document. According to the Delaware Limited Liability Company Act, Section 18-101, an operating agreement can be “implied, oral, or written.” However, oral and implied agreements are nearly impossible to enforce, so it's much easier to have everything written down. If any legal action occurs between members of the LLC, the courts in the state of Delaware will enforce the operating agreement as you have written it.
Some banks will require you to furnish a copy of your LLC's operating agreement in order to grant you a business bank account. The reasoning behind the requirement is to make sure the person applying for a business bank account actually holds the power to sign for the company. Your bank may require the operating agreement as well as the federal tax ID granted by the IRS before issuing you a business account.
If any of the needs of the business change, you should update your operating agreement. When any of the members want to make changes to the operating agreement or how the business is owned, it's important to amend the agreement and require all remaining members to sign it once more. Along with outlining the management and ownership structure, your operating agreement should include anticipation of potential future problems, as well as possible solutions that can help the business avoid legal action, such as litigation.
When properly drafted and executed, an operating agreement is similar to a prenuptial agreement in a personal relationship. Its purpose is to help those involved in the business to avoid any potential disagreements and disputes, especially if certain members want to take the company in another direction. The agreement will clearly outline all parties' expectations and plans to address any future issues.
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