How to Write an LLC Operating Agreement: Everything You Need to Know
If you want to know how to write an LLC operating agreement, you should know exactly what the agreement should include, and its legal importance. 3 min read
How to Write an LLC Operating Agreement
If you want to know how to write an LLC operating agreement, you should know exactly what the agreement should include, and its legal importance. While this agreement is not required in most states, it is a very important and beneficial document for your LLC to have on file. Remember that the Articles of Organization, which is the formation document required in every state in order to register your LLC, does not govern your LLC. Therefore, the document cannot be used to include information on how your LLC will operate, nor does it include information regarding different decision-making processes.
The operating agreement is more important for multi-member LLCs rather than single-member LLCs. If you form your own single-member LLC, you are in charge of the daily operations of your business. However, if you are an owner in a multi-member LLC, then you will want to ensure that all members are fully aware of their rights and responsibilities.
LLC Operating Agreement Importance
The LLC operating agreement is also referred to as the following:
• LLC Bylaws
• LLC Operations Agreement
• LLC Setup Agreement
This agreement is the members’ way to legally bind one another to the operations of the business in the event that a legal dispute arises among members.
If you choose not to draft this agreement, the state LLC rules will govern. This could lead to both unfair and unpleasant issues among members.
Steps in Forming an LLC Operating Agreement
First and foremost, you will need to include basic information regarding your business. This includes the name of your business, principal address, registered agent name and address, and member names. Note that this information will also be included in your LLC’s Articles of Organization.
The operating agreement will also identify a statement of intent, which provides that your business intends to comply with state laws. You will also need to include the purpose of your LLC, i.e. the nature of your business and industry you are operating in. Be sure to include the length of time your LLC will be operating. If operating indefinitely, then you’ll want to indicate as such in the agreement. If only operating for a specific period of time, then you will provide an end date.
You will also provide a start date for your business. Generally, most businesses have an immediate start date; however, some businesses wish to delay conducting business, in which a specific date is entered indicating when the LLC will begin conducting business.
Once you’ve provided general business information, you’ll want to begin drafting specific details regarding decision-making processes, profits/losses, authority for each member, etc. This is where you will want to be very specific in explaining the authority of such members, as this is what can lead to potential conflict among members.
For example, if a member contributes 50% to the LLC, he or she will usually own half of the business, thus receiving half of the profits. However, members can determine who holds what percentages based on mutual agreement.
Additional information to be included in the agreement are the roles and responsibilities of the members. You will want to designate what each member is responsible for, and how they are expected to perform in that role. You’ll also want to indicate whether or not the member will be paid additional compensation for their role.
Be sure to include the frequency of distributions. Will the profits be distributed quarterly, monthly, bi-annually, or annually? Remember that you’ll be required to pay self-employment taxes on your share of the company’s profits; whether or not those profits are distributed.
Also include information regarding voting. For important decisions regarding the LLC, you should require a majority vote. Draft specific policies and procedures surrounding such voting decisions, while also indicating if you will hold a meeting to discuss the voting procedures. While you are not required to hold annual meetings or keep meeting minutes of such meetings, it is still very beneficial to do so.
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