Delaware LLC Operating Agreement: Everything You Need to Know
A Delaware LLC operating agreement helps all members of an LLC understand their individual responsibilities. 4 min read
A Delaware LLC operating agreement helps all members of an LLC understand their individual responsibilities. Without this document, there could be confusion about who's in charge of certain things, such as signing contracts or training new hires. Though an operating agreement isn't required, it's recommended that you create one when you're setting up your LLC.
What Is an Operating Agreement?
The articles of origination is a document that lists the company's basic information, but the LLC operating agreement actually outlines the company's structure.
Individuals setting up a Delaware LLC can use this document to state who is responsible for what duties, how profits and losses are handled, how your LLC will change owners, and more. Drafting an operating agreement is important because you and the other LLC members can refer to it if you ever run into issues with how the business should be run or organized.
Though you'll want to include information about how your LLC will handle a range of scenarios, you and the other members with whom you create and sign this contract can add any rules and requirements that you wish in the operating agreement. Once the document is completed, you'll need to have all members sign it. You can then have it authenticated by a Delaware notary public.
When Should I Create an Operating Agreement?
Though it's difficult to imagine changing owners or dissolving your business when you're just setting up your LLC, you need to officially articulate how your enterprise will handle these types of situations. This should be done before you're open for business in order to avoid arguments about who's in charge for what responsibilities after your LLC is already running.
However, the operating agreement can be amended or changed. This is done by a unanimous vote from the LLC members, though you can also include in the agreement how many members need to consent to a change in order to add it.
If you didn't form an operating agreement before starting an LLC, you can create one at any point in the company's lifetime. Here are a few other tips for creating a Delaware LLC operating agreement:
- Create a copy of the agreement for the company's files and one copy for each member.
- Per the Delaware LLC Act, the operating agreement can be a written, oral, or implied contract. However, only a written and notarized contract is actually enforceable.
- Depending on who is granted signing power per the operating agreement, you may need to have this document and your federal tax ID number with you when you go to open a business bank account.
- Revisit the document whenever your business undergoes a change. If you amend the agreement, draft a new copy and have it notarized, signed, and filed to officially replace the old one.
Types of LLC Operating Agreements
You'll need to prepare a certain type of operating agreement based on your LLC structure. These are the types available:
- Single-Member LLC Operating Agreement: Single-member Delaware LLCs benefit from an operating agreement that adds provisions to provide the member with extra liability protections. An operating agreement is also recommended to outline what happens to the business if the single member should die.
- Multi-Member LLC Operating Agreement: Multi-member operating agreements help identify whether managers or members are in charge of certain business operations. This can be used to ensure that the members and managers fulfill certain responsibilities or as terms and conditions that a new member or manager must meet. This type of agreement is especially helpful for family businesses and joint ventures.
- Multi-Member LLC Operating Agreement With Three Member Classes: This type of operating agreement allows you to assign duties to groups rather than members. You simply have to add the names of which members belong to which groups. This is helpful for things such as estate and succession planning.
- Series LLC Operating Agreement: Series LLCs are unique to Delaware. This type of operating agreement allows you to divide a business into different sub-entities and to assign those sub-entities responsibilities over specific assets. Each entity can have its own financial records and is not held liable for the financial conditions of the other entities. You can create as many sub-entities as you'd like for your series LLC.
- Series LLC Operating Agreement with Three Member Classes: This agreement type combines the structure of a member class with that of a Series LLC. LLCs can thus create sub-entities and assign members to separate groups within those entities.
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