Sample LLC Operating Agreement

An LLC operating agreement is a legal document that is similar to corporate bylaws. It is a contract that allows Limited Liability Company (LLC) members to agree on a variety of important issues.

These include things like the LLC's operation, ownership, finances, and more. Without these bylaws, your LLC will have to operate according to the default LLC rules of your state. Those rules may not be ideal for your LLC.

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When To Create Operating Agreements

The best policy is to create your LLC operating agreement when you start your business. But if all members agree, you can still create an operating agreement if your LLC is more mature.

The following guide will help you understand the key provisions in an LLC operating agreement.

Is an LLC Operating Agreement Legally Required?

Not all states require an LLC operating agreement. States that legally require them include California, Missouri, Nebraska, Maine, Delaware, and New York. But state laws are subject to change. Contact your Secretary of State to learn more about your requirements.

Even if your state does not require an operating agreement, it is still a good idea to have one. The U.S. Small Business Association (SBA) recommends that all LLCs create an operating agreement even if it is not required in their state.

Your LLC could need an operating agreement for a variety of reasons:

• You may need to show your operating agreement to open a business bank account.
• Potential investors or new members could ask to see your operating agreement.
• If your LLC buys property, you may need to show your operating agreement to a title company.
• Lawyers and accountants may ask for an LLC operating agreement.
• Courts may not honor oral agreements between LLC members. In some states, agreements between LLC members about governance and membership must be in writing.

Is an LLC Operating Agreement Necessary for a Single-Member LLC?

Yes. An LLC Operating Agreement is a key legal document. This is true whether your LLC is a multi-member LLC or a single-member LLC. For multiple-member LLCs, it is important to agree on ownership, voting rights, and more to avoid future conflicts.

A single-member LLC does not need to worry about disputes between members. But they will still benefit from having an operating agreement in place. Having an LLC operating agreement adds legitimacy to a sole-owner LLC's limited liability status and prevents the business from being seen as a sole proprietorship. This is necessary to help shield you from business liability. If someone sues your business, limited liability protection helps to prevent your personal assets from being at risk. The same is true if your LLC owes debts or other obligations.

Another reason for creating an LLC operating agreement is to avoid your state's default LLC rules. Your state's default rules might not be suitable for your business needs. You can contract out of those default rules through your operating agreement.

State Default Rules

States usually have default rules for LLCs that do not have operating agreements. These rules vary by state. Some default state rules provide that profits and losses are distributed evenly among LLC members. Your LLC might prefer to allocate profits and losses according to percentage ownership. You can do this through your operating agreement.

Even if your state's default rules are satisfactory now, they are subject to change. Having an LLC Operating Agreement in place helps you to avoid future uncertainties.

Differences Between Articles of Organization and LLC Operating Agreement

The articles of organization and operating agreement are separate legal documents. Articles of organization are papers that you file with your state. They establish your LLC as an official business entity.

The LLC operating agreement is an essential contract among the members. It establishes the organization and governing rules of the company. The operating agreement is not filed with the state. It should be kept in a secure location with other important LLC documents.

What Issues Should the LLC Operating Agreement Cover?

An LLC operating agreement should contain provisions to cover:

• Basic information about the LLC. This includes the company name, address, and place of business.
• A profit and loss allocation plan. This is often called the distributive share.
• The LLC's purpose
• The management structure. Your LLC may have managers, or the members may manage it. You should include a section on the decision-making authority of members and managers.
• Ownership percentages of each member. This might be based on their capital contributions. But you can structure your ownership percentages in any way that all members can agree on.
• Voting rights and procedures. Some LLCs allocate votes according to their members' ownership percentages.
• Meeting frequency
• Procedures for bringing in new members
• Identifying the authorized member of the LLC. The authorized member can sign legally binding agreements on behalf of the company.
• Members' rights and responsibilities
• Whether the LLC will provide an annual report to its members
• Limitation of liability. One of the main advantages of an LLC is liability protection. It is a good idea to reiterate your company's limited liability protection in the operating agreement.
• A buyout agreement in case a member leaves the LLC or dies
• A plan for how to dissolve the LLC, if necessary

Sample LLC Operating Agreement

To help you familiarize yourself with how an LLC operating agreement might look, we have provided the following sample page:

How an Attorney Can Help

Whether you are a small business startup or an existing LLC, you might have concerns about writing an LLC operating agreement.

If you have questions, you should contact a business attorney today. They can help draft a new LLC operating agreement or update existing agreements.

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