An LLC operating agreement, also known as an LLC agreement, LLC partnership agreement, or an operating agreement, sets out the roles and responsibilities of company owners and managers and governs internal operations.
It helps establish the relationship dynamic between the parties involved. It ensures that the right people make business’ financial and functional decisions when necessary.
An LLC is a type of business formation that offers limited liability protection to its members. For example, an LLC protects individual members if a creditor pursues a collection of the business's debts.
This is different from a general partnership, in which the members are personally liable for the debts and responsibilities of the business.
Here are 10 things to include in an LLC operating agreement.
1. Name and Address of the LLC
An LLC operating agreement is a legal document that creates the rules and regulations a company will operate under. As such, the first thing that needs to be included is the name and address of the LLC to which the operating agreement applies.
Naming an LLC is often tricky, so you want to get that all done before tackling this document. Unfortunately, there’s no guarantee you will get the name you want until you have it. Fortunately, states generally have procedures in place to check the availability of a name before filing articles of organization.
2. LLC Member and Manager Information
The next thing your LLC operating agreement needs to include is all the names and information of all members and managers who will have an ownership stake and or be involved in running the company. This usually also includes a list of their titles in the organization.
3. LLC Articles of Organization
The limited liability company agreement that governs business operations also needs to include the articles of organization. Articles of organization are the document that creates your LLC and gives it the ability to function, and must be filed in the state where the business is registered to obtain your EIN (employee ID number) and a business checking account.
Here is an article that explains articles of organization.
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4. Business Purpose of the LLC
The next part of your LLC operating agreement is a section that outlines the business purpose. The business purpose should be a concise statement that describes the nature of your business and answers questions like:
- Why was your company created?
- What do you do? Who do you serve?
- Why did you choose to formalize your business as a limited liability company?
5. Management and Voting Structure
Often, arguments and power struggles happen in businesses where the management and voting structure and hierarchy are unclear. Your LLC operating agreement should answer:
- Who makes business and financial decisions?
- What the rules, regulations, and processes within your organization are?
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6. Capital Contributions
Usually, when you create a company, you and your fellow members will contribute financially to the business. This usually determines the ownership stake each member will have in the company.
The capital contributions of each member must be included in the LLC operating document. This also applies when buying an LLC which is a going concern.
7. Distribution
The distribution section of the LLC operating agreement will formalize the distribution of shares between the company members. This is usually the same as the percentage of capital contributions. Still, it could differ based on your particular company’s negotiations.
8. Membership Changes
Sometimes, when you have a business, you want to add a new member, and sometimes, members want to leave the company. This section of the LLC agreement will outline how new members can be added and the process when a member wants to leave the company.
It’s important to include this section in both a multi-member LLC and a single-member LLC because both could face this situation.
9. Dissolution
From time to time, companies decide to close shop. Sometimes, this is because of financial reasons. Still, it could also be because the members simply want to resign or do something else.
The dissolution section of an LLC agreement will set out the method used to wrap up affairs and dissolve the company, which will also be governed by state law.
10. LLC Member Signatures
Like any legal document, an LLC operating agreement, cofounder agreement, or LLC partnership agreement needs to have the signatures of all members on the document. It will also need to be dated and witnessed to ensure its legally binding.
Get Help Drafting an LLC Operating Agreement
Many people wonder if they need an LLC, or sometimes what the benefits of a real estate LLC are. The main reason you might want to have an LLC is that it creates a separate legal “person” and, as the name suggests, limits your liabilities related to the business.
Suppose you are starting an LLC with partners. In that case, it’s even more important to have a detailed agreement so that everyone knows exactly where they stand and their rights and responsibilities.
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