Delaware LLC Operating Agreement Template: Everything You Need to Know
A Delaware LLC Operating Agreement template sets forth all the pertinent sections a business needs to factor in their own business.4 min read
A Delaware LLC Operating Agreement template sets forth all the pertinent sections a business needs to factor in their own business. It's important to draft a comprehensive one as the main governing document of an LLC is the Operating Agreement.
What is an Operating Agreement?
The operating agreement is a contract, which means all parties must agree to its terms. The Delaware Limited Liability Company Act Section 18-101 allows Operating Agreements to be written, oral, or implied, but you should keep it in writing. Operating Agreements are not required to be filed publicly.
Different Types of LLCs
In single-member LLCs, the Operating Agreement would be used by the sole proprietor, and it would offer the same benefits afforded to larger LLCs. Even though Delaware doesn't mandate one, single-member LLCs should have an Operating Agreement. Valid Operating Agreements are important documents if the only member passes away.
Operating Agreements are primarily geared towards member-managed and manager-managed LLCs. In member-managed LLCs, the agreement often puts the members in charge of operations. In manager-managed LLCs, the Operating Agreement sets forth the manager who will be running the LLC, and it can specify limitations on their leadership.
A multi-member LLC with three classes has a special Operating Agreement, which is typically seen in estate planning, and details what each class's responsibilities and obligations are. Unlike other states, Delaware has a unique series LLC. LLCs in Delaware can be divided into distinct sub-entities who can manage, own, and control various assets, maintain separate financial records, and be sheltered from financial problems with other series, or sub-entities.
How to Form an LLC?
- Complete the LLC application.
- You must include a cover sheet with pertinent information. Download the PDF cover sheet on the Division of Corporation's website.
- Pay the LLC filing fee.
- You need to appoint a Registered Agent.
- You need an Employer Identification Number (EIN) from the IRS, which allows you to conduct business.
Writing an Operating Agreement
Start your Operating Agreement with basic information and declare whether the LLC has a single member or multiple members. Each section has required information that ranges from background on the LLC to individual information on each contributing member.
Each member should take the time to review all sections:
- Assignment of Interests.
- Withdrawal Events.
- Representation of Members.
All members must sign the Operating Agreement.
Tips on Operating Agreement
LLCs may also issue non-voting capital or Class B Nonvoting Capital. Members can own interests in both. Although nonvoting members cannot vote, they do have the right to become involved with dispute resolution hearings like mediation. Each member needs a separate capital account for Class A and Class B capital.
Voting members of the LLC may appoint any member or other entities or people to take action on behalf of the company if they feel it's warranted.
There is no requirement to hold meetings for voting members. LLC members who hold at least 67% of the voting capital and appear in person, by phone, or through a proxy, will meet the requirement for a quorum at a voting members' meeting. If they cannot achieve a quorum, a majority of members can request to adjourn the meeting to a date no further than 60 days out.
Once guaranteed payments are deducted, profits and losses are divided among members as per their ownership percentages. Distribution amounts and timing are determined by voting members. Neither the LLC nor its members shall be subject to liability for any distributions made.
Once the Articles of Organization are filed, members cannot resign or be entitled to receive any capital refunds, except with written consent of all other voting members. If a member dies, the member's estate or beneficiaries are entitled to receive fair market value of the deceased's members interest, with an adjustment made for profits and losses up until the date of death. Voting members can come to a unanimous good-faith agreement on fair market value.
In the event of member bankruptcy, a creditor's charging order or a lien on a member's interest results in a material breach. If this happens, the claimant or creditor will only receive assignee rights. They will have no rights as a member or to participate in management of the LLC. They are only entitled to the share of the profit and losses of which the member would've been apportioned.
If members have a disagreement or dispute, they will try to reach an agreement themselves. If they cannot, members will first utilize mediation and then advance to arbitration if mediation does not resolve the issue at hand.
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