Key Takeaways

  • A Delaware LLC operating agreement outlines ownership, management structure, voting rights, profit distribution, and dissolution procedures.
  • Even though Delaware law does not mandate it, having an operating agreement helps preserve liability protection and avoid internal disputes.
  • Member-managed LLCs allow all members to participate in daily operations, while manager-managed LLCs centralize control.
  • Agreements should cover capital contributions, membership changes, tax treatment elections, and dispute resolution.
  • Customization is key—templates can provide a starting point, but tailoring ensures compliance with Delaware law and member expectations.

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.

Legal Importance in Delaware

Delaware does not legally require LLCs to adopt an operating agreement, but the document is strongly recommended. Courts and financial institutions often expect to see one as evidence of the LLC’s legitimacy. Without a written agreement, disputes are resolved under default provisions of the Delaware Limited Liability Company Act, which may not align with member intentions. A signed operating agreement demonstrates the members’ consent to the chosen structure, helping to maintain limited liability protections and prevent the LLC from being treated as a sole proprietorship or partnership in litigation.

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.

Key Provisions to Include

A strong Delaware LLC operating agreement should include:

  • Ownership Percentages – Clearly state member ownership shares and whether these align with capital contributions.
  • Profit and Loss Allocation – Specify how income is divided and reported for tax purposes.
  • Tax Elections – Address whether the LLC will be taxed as a partnership, S corporation, or C corporation.
  • Dispute Resolution – Establish procedures such as mediation or arbitration to resolve conflicts without court intervention.
  • Succession Planning – Outline how membership interests are transferred upon death, disability, or voluntary withdrawal of a member.

By covering these items, the agreement minimizes ambiguity and ensures smoother business operations.

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.

Delaware-Specific Flexibility

Delaware’s LLC Act is known for its contractual flexibility. Unlike some states, Delaware permits extensive customization in an operating agreement, allowing members to waive fiduciary duties, limit liability for managers, or define unique voting thresholds. This flexibility is one reason Delaware remains a leading state for LLC formation. Members can tailor rules to fit their business, whether creating equal rights among all members or concentrating authority in certain individuals.

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.

Best Practices for Member-Managed Agreements

In a Delaware member-managed LLC, all members are considered agents of the business. To avoid conflicts, the operating agreement should clarify:

  • Which decisions require unanimous consent versus majority approval.
  • Day-to-day authority each member has for contracts, banking, and hiring.
  • How disputes will be handled if members disagree on operational issues.
  • Limits on individual authority to prevent one member from making binding commitments beyond an agreed scope.

Documenting these rules helps maintain order and prevents misunderstandings that could jeopardize the business.

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.

When to Choose Manager-Managed

Delaware businesses with multiple passive investors often choose a manager-managed structure. This model allows experienced managers to run daily operations while limiting the involvement of other members to major decisions. The operating agreement should specify:

  • Manager appointment and removal procedures.
  • Whether managers are compensated or act as fiduciaries.
  • Which decisions remain reserved for member approval, such as mergers or dissolutions.
  • Liability protections and indemnification for managers acting in good faith.

This structure is common in larger or investor-backed LLCs that want operational efficiency without giving every member equal management rights.

Frequently Asked Questions

  1. Is a Delaware LLC operating agreement legally required?
    No. Delaware law does not mandate one, but it is highly recommended to avoid relying on default state rules.
  2. Can a Delaware LLC operating agreement be oral?
    Yes, Delaware permits oral or implied agreements, but written agreements provide clearer evidence and protection.
  3. What happens if my LLC doesn’t have an operating agreement?
    Your LLC will be governed by Delaware’s default LLC Act provisions, which may not reflect the members’ preferences.
  4. Can I use a template for my Delaware LLC operating agreement?
    Templates are a good starting point, but they should be customized to fit your business’s needs and Delaware’s flexibility.
  5. How often should I update my operating agreement?
    It’s best to review and update the agreement when major changes occur, such as new members joining, shifts in management, or tax elections.

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