Purpose of an LLC Operating Agreement

Every LLC in the state of Delaware should have an operating agreement. This agreement protects the day-to-day operations of the business. This legal document also includes information about ownership structure and any procedures. An LLC operating agreement in Delaware should include the following components:

  • Organization: This includes information about the business formation date, current members, and who owns what in the business. It is possible that in some multiple member LLCs, members have a different number of units.
  • Management and voting processes: Information about who will manage the business should be included. The agreement should also include how voting will take place. It is possible that some members will have more voting power than others.
  • Capital contributions: This includes information about how much each member has invested in the business. This section will also include information about how additional funds will be raised.
  • Distributions: This is a detailed plan on how profits will be divided among any members. Most commonly, businesses divide profits equally but it is possible that some members will receive more.
  • Change of membership process: The operating agreement should also include information about what to do in the event of a change of membership. This would include the process of buying out or replacing governing members.
  • Dissolution: This includes a detailed plan on what will happen should each member no longer want ownership in the business. In most cases, the business will be dissolved, but it is important to detail the specific steps.

Advantages of Having an LLC Operating Agreement

There are many advantages to having an LLC operating agreement:

  • Delaware recommends having an operating agreement.
  • An operating agreement can prevent conflict between governing members. Creating an operating agreement requires each member to lay out the specific regulations.
  • It maintains your LLC status. It can be difficult to maintain an LLC status if you are a single owner. By having an operating agreement, this can legitimatize the LLC to the courts and to customers.

Unique Characteristics of an LLC

LLCs are a common type of business in Delaware. They are usually one of two management structures, including member-managed or manager-managed. As a default, most LLCs are member-managed. If owners prefer the LLC to be manager-managed, then they should express that in the operating agreement.

Members will choose whether their LLC is member-managed or manager-managed by considering a few things:

  • The number of members in the LLC.
  • The relationship of each member to other members.
  • Their experience or expertise in the business.
  • The size of the business.
  • How complex the day-to-day operations are.

LLC businesses that have more members or more complex operations tend to be manager-operated.

Member-Managed LLCs

In a member-managed LLC, every member is actively involved in the business. Generally, they only become members because they are already a managing part of the business. The LLC operating agreement will determine how much management power each member has.

It is possible that some member-managers will have more decision-making power than others. If a vote is required to make decisions, this should be included in the operating agreement. Additionally, some LLCs require a unanimous vote in order to make important decisions.

A few important decisions that might require a unanimous vote include amending items in the LLC operating agreement, making interim decisions, the admission of new LLC members, the decision to dissolve the company, or the decision to merge or convert the LLC business.

Smaller decisions such as when and where meetings will take place and requirements of notice should be included in the LLC operating agreement.

Manager-Managed LLCs

Manager-managed LLCs are often run like a corporation. The manager makes big decisions, sometimes without the consent of the members. The manager will also manage the day-to-day operations of the business. The hiring process, firing process, and decision-making capabilities of the manager are dictated in the LLC operating agreement. The LLC might also have specific requirements regarding the qualifications of a manager.

As you can see, an LLCs operating agreement is a very important part of the business. If you need help with a Delaware LLC operating agreement member-managed, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.