Two Member LLC Operating Agreement: Everything You Need to Know
The purpose of an operating agreement is to provide the guidelines for governing the operation of an LLC. 3 min read
2. Importance of an Operating Agreement
3. Why Does a Two-Member LLC Need an Operating Agreement?
4. Which Operating Agreement to Use
5. What to Include in an Operating Agreement
Updated November 4, 2020:
A two-member LLC operating agreement is a document that outlines the ownership and operational structures and procedures of a limited liability company (LLC) with two owners, also known as members. While an operating agreement is not a requirement for forming an LLC in many states, it serves the important purpose of keeping the company operating smoothly and efficiently, with minimal misunderstandings and disputes.
What Is an Operating Agreement?
The purpose of an operating agreement is to provide the guidelines for governing the operation of an LLC. The details of the agreement vary depending on the number of members, management structure, investment, tax considerations, profit-sharing, and other factors. In an LLC with more than one member, this document serves as a binding contract between members.
Importance of an Operating Agreement
There are some states that require business owners to file an operating agreement as part of the LLC formation process. Sometimes, only LLCs with more than one member are required to have an operating agreement. Whether or not it is mandatory by law, an operating agreement can be beneficial to an LLC in a number of ways:
- Gives owners control of the business: Without an operating agreement, many aspects of an LLC will be subject to state laws, also known as default rules. State laws act as a standard operating agreement for an LLC that does not have its own.
- Offers personal liability protection for owners: Without an operating agreement, owners of an LLC can be susceptible to personal liability if they are seemingly running the company like a sole proprietorship or partnership.
- Provides all owners with clear details of business arrangements: When all owners have a clear understanding of the procedures and rules of the LLC, there will be fewer misunderstandings and disputes.
Why Does a Two-Member LLC Need an Operating Agreement?
A multimember LLC, including a two-member LLC, is more likely to experience disputes if the owners fail to establish clear lines of communication with each other during the early stages of the company. To minimize disputes in the future, all members should voice their concerns and write them down in an operating agreement. For instance, they need to discuss what actions they should take if they do not like other members of the LLC in the future.
An operating agreement for a two-member LLC will explain in great detail what the owners should do if a certain member is not doing his or her share of work or decides to leave the company.
Which Operating Agreement to Use
If your LLC has two owners who will be involved in the daily operations of the company, you should use the multimember member-managed LLC operating agreement. On the other hand, if both the members will not be involved in the LLC's day-to-day operations, the manager-managed operating agreement is a better option.
The multimember operating agreement is specially designed for LLCs with more than one owner. It is the only document that designates an LLC's owners and the percentage of the company they own. Both members should sign the operating agreement in the presence of a notary public. Copies of it should be given to the members, while the original should be kept at the LLC's principal address.
What to Include in an Operating Agreement
An operating agreement is specially created to address the unique needs and goals of a particular company. As such, there is no one-size-fits-all approach to drafting an operating agreement. However, almost every operating agreement includes these basic provisions:
- Identifying information: Name of the LLC and addresses of the principal business office and registered office
- Statement of intent: A statement confirming the operating agreement complies with state laws and the LLC will be officially established once the required documents are submitted to the state
- Business purpose: Nature and purpose of the business, as well as a statement to cover possible changes in the future, such as "and for other lawful purposes”
- Term: Duration of the LLC's existence, which can be until the dissolution of the LLC or the duration of a project
- Tax treatment: Tax status of the LLC, which can be sole proprietorship, partnership, C-corp, or S-corp
- Addition of new members: Manner in which the two-member LLC accepts new members
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