What is an Operating Agreement for an LLC?: Everything to Know
An LLC operating agreement creates the terms that the company will follow regarding oversight, governing, and long-term operations.4 min read
2. What Is in an Operating Agreement?
3. Do I Need an Operating Agreement?
4. What Happens After Operating Agreement Is Drafted?
5. LLC Operating Agreement Requirements by State
What is an Operating Agreement for an LLC? 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 an LLC Operating Agreement?
An LLC Operating Agreement is considered to be the most significant document that the LLC will create because it establishes 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
Most states do not require LLCs to produce an Operating Agreement. However, it is highly recommended to formally establish an Operating Agreement between members to prevent disagreements in the future. The agreement should cover:
- Membership responsibilities
- How profits and debt will be distributed among members
- How the limited liability of the organization will be protected
The agreement can be written or oral. In case there is a future dispute, written agreements are recommend because they acknowledge what actions the members agreed to perform ahead of time.
An Operating Agreement for an LLC may be referred to as an:
- Operating Agreement
- 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 the 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 holding 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.
What Happens After Operating Agreement Is Drafted?
An Operating Agreement should be filed and stored in a safe and secure place. 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.
LLC Operating Agreement Requirements by State
- LLCs in California must have an oral or written Operating Agreement. If written, the agreement must be filed with official company's records.
- LLCs in New York are required to have an Operating Agreement that is written. The written document should include:
- The purpose of the company
- How the business will be conducted
- The rights, duties, and powers granted to the managers, employees, agents, and members
- LLCs in Missouri must have an oral or written Operating Agreement. If written, the agreement must be filed with official company's records. The rights, duties, and powers granted to the managers, employees, agents, and members should also be addressed.
- LLCs in Maine and Delaware must have an oral or written Operating Agreement created at some point during the filing for an LLC.
- LLCs with more than one member and that were organized in Alabama, California, or Ohio, must have a written Operating Agreement.
- LLCs in Arkansas, the District of Columbia, or New Mexico must have all Operating Agreements written. Oral agreements are not encouraged.
- Unless addressed in the Articles of Organization, Iowa requires that the Operating Agreement also be written.
LLCs in Colorado, Connecticut, Georgia, and Kentucky with only one member must have an Operating Agreement.
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