What Is an LLC Operating Agreement?: Everything to Know
An LLC Operating Agreement creates the terms that the company will follow regarding oversight, governing, and long-term operations.3 min read
What is an LLC Operating Agreement? An LLC Operating Agreement is a contract between the members of an LLC. The agreement creates the terms that the company will follow regarding oversight, governing, and long-term operations.
What Is in an LLC Operating Agreement?
An LLC Operating Agreement is considered to be the most significant document of the LLC because it draws out the framework and roles of the business. More specifically, this agreement outlines the working and financial relationships among the managers and members of the company. Most Operating Agreements include these six sections:
- Management and voting
- Capital contributions
- Membership changes
The agreement identifies the rules agreed to by all members of the LLC in managing profit distribution and disputes. It's significantly more important for a multi-member organization to have an Operating Agreement, rather than a single-member LLC. The agreement can be written or oral. In case there is a future dispute, written agreements are recommended because they acknowledge what actions the members agreed to perform.
An Operating Agreement for an LLC may also be known as an:
- Operating Agreement LLC
- LLC Agreement
- LLC Partnership Agreement
- Operating Agreement for LLC
What Is in an Operating Agreement?
An Operating Agreement usually consists of six sections or articles.
Article I: Organization
- How and when the company was created
- Who are the members of the LLC
- The ownership arrangement
Article II: Management and Voting
- How the members manage the organization
- The level of authority that members have regarding company affairs
- How the voting process takes place
- The number or percentage of votes needed to take action
Article III: Capital Contributions
- The amount of capital contributed from each member
- The amount of future capital expected from each member
- The ratio of capital to ownership units or percentages of the company
Article IV: Distributions
- How losses and profits are distributed among members
Article V: Membership Changes
- The protocol for removing or adding members
- The process for transferring ownership
Article VI: Dissolution
- The circumstances that must take place for the company to be dissolved
The Operating Agreement may also cover the following topics:
- Obligations regarding periodic meetings
- Check signing process
- Dispute resolution process
- Member participation in the daily operations
- Voting rights
- Ownership transferability Indemnification rights
Do I Need an Operating Agreement?
The states below require an LLC to have an Operating Agreement:
- New York
An LLC with more than one member will benefit from arranging an Operating Agreement because it will clearly state the responsibilities and roles of each member. It's also recommended for single-member LLCs to complete an Operating Agreement because it will add credibility to the business and may help prevent limited liability from being expunged.
Nearly all states agree that the failure to produce an Operating Agreement does not lead to the loss of limited liability. It is highly recommended to create an Operating Agreement with other members in the LLC and is considered quite risky to not have one.
An Operating Agreement is essentially the blueprint for how the company will function. It will describe how to manage:
- Disputes and disagreements
- Technical aspects of the LLC
- Ownership transferability
What Happens After Operating Agreement Is Drafted?
An Operating Agreement does not need to be filed with any governmental department. Instead, it should be kept with the records of the business. All members of the LLC should be provided with a copy of the agreement. When any major event occurs within the LLC, such as losing or adding a member, it's recommended to consider reviewing and/or updating the agreement. As long as all members agree to the changes, an Operating Agreement may perpetually be amended.
What Is Required to Be Listed in an LLC Operating Agreement?
Each Operating Agreement is different because the members and circumstances are different. However, all agreements should include the following attributes:
- A Certificate of Formation
- Location of the registered office
- Name of the registered agent
- Voting rights
- Membership transferability guidelines
- Business purpose
- Principal place of business
- Initial capital contributions
- Process for the distribution of profits
- How the company will be managed
- Authority of the members and managers
- Recordkeeping process
- Management fees
- Indemnification rights
- Dissolution process
- Specifies who has authority to sign contracts
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