An operating agreement, in simple terms, is a legal document that establishes the rights and responsibilities for each member of a Limited Liability Company (LLC). Not all states mandate LLCs to have an operating agreement, so some LLCs may not elect not to write one.
If your state makes it a requirement or you find it important to have one after considering the benefits, then you will want to learn how to write an LLC operating agreement.
This article discusses the step-by-step process of writing a LLC operating agreement as effortlessly as possible. This guide will also teach you other fundamentals of an operating agreement, including the various types and critical elements to include in your operating agreement.
What Is a Written LLC Operating Agreement?
A written LLC operating agreement is a legal document used by Limited Liability Companies (LLCs) to establish and outline the rights of each LLC member. The agreement also provides details about the LLC’s management, including voting, decision making, meetings, and more.
Generally, LLCs use this document to govern their internal operations to suit the specific needs of each member. Everyone who signs an operating agreement is bound by the terms of the agreement.
While operating agreements aren’t mandatory for many states, it is strongly recommended to draft one when setting up your LLC because of their benefits, especially if there is more than one member.
A few of these benefits include ensuring members and owners adhere to the business’ rules and responsibilities set in the operating agreement, allowing owners to monitor the company's internal operation according to their specifications. Without a written LLC operating agreement, it means your business will run based on your state's default rules.
Here is an article to learn more about LLC operating agreements.
Types of LLC Operating Agreements
An essential aspect of learning how to write an operating agreement is understanding that there are different types and knowing when to use which type. Types of LLCs operating agreements are:
- Single-Member LLC Operating Agreement.
- Multi-Member LLC Operating Agreement.
- Multi-Member LLC Operating Agreement with Three Member Classes.
- Protected Series LLC Operating Agreement.
Type 1: Single-Member LLC Operating Agreement.
Single-member LLCs do not require operating agreements. However, most LLC lawyers and business lawyers often recommend that primary owners of the LLCs have one, signed and dated, for formality’s sake.
Most importantly, an LLC operating agreement becomes handy when the primary member dies. You can add as many custom terms to the agreement.
Type 2: Multi-Member LLC Operating Agreement
A multi-member LLC operating agreement applies to member-managed and manager-managed LLCs .
The written operating agreement for member-managed LLCs puts the members in charge of the internal operations of the company. Internal decisions are made via a voting system, either based on percentage interests or per person.
This operating agreement may be customized, assigning unique responsibilities and/or rights to each member. Member-managed operating agreements are often used in joint ventures between companies, family businesses, etc.
Manager-managed operating agreement streamlines the leadership of a company to one or more third-party managers. These managers are responsible for the business' operations and are typically elected to be a manager by company members. When writing a manager-managed LLC operating agreement, ensure you set limitations on the manager as you deem appropriate.
Type 3: Multi-Member LLC Operating Agreement with Three Member Classes
LLCs may be as sophisticated in their structure. One more complex structure is the multi-class structure, which divides members into separate classes, assigning unequal responsibilities, rights, and preferences to each group member.
Multi-class operating agreements are often written to cater to such an organizational structure. The agreements will include names of each member in each class plus their assigned rights or responsibilities. There are no restrictions on how many classes of membership you can include in a multi-class operating agreement. They are often used in succession planning, estate planning, etc.
Type 4: Protected Series LLC Operating Agreement.
LLCs use protected series LLC operating agreements to manage multiple assets or properties, separating each property like they were a separate entity.
Typically, this type of LLC operating agreement allows LLCs to:
- Own, monitor, control, and manage separate properties.
- Have separate management or members.
- Have separate financial records.
- Pursue various businesses.
- Protect from financial conditions of other included businesses in the LLC.
The protected series LLC operating agreements are typically drafted by LLC lawyers.
Here is an article about the types of LLC operating agreements.
How To Write an LLC Operating Agreement – Step by Step
Below is a step-by-step breakdown of how to write an LLC operating agreement:
Step 1: State Ownership Personal Details
First, you must write information of all the members of your LLC. This includes their names, contact addresses, and titles. Also, you should determine and specify their ownership percentages in the operating agreement.
Step 2: Assign Responsibilities, Rights, and Compensation Details
Operating agreements are instrumental for protecting members of an LLC. After writing each member's information, including their ownership percentage, the next is to assign rights and responsibilities to each of these members.
This may include voting rights , daily responsibilities , performance requirements , financial compensation , etc.
Step 3: Specify the Terms to Join or Leave the LLC.
The next step establishes a protocol for existing members or future members know the terms binding both situations. This section will outline how existing members can leave and how future members can join.
This is a vital step, as it creates an objective outline of how to handle both of these situations. Ensure your terms are detailed and clear enough, defining essential aspects of the agreement, including what happens to such a member's ownership percentage after leaving and the compensation when adding a new member.
Step 4: Define Dissolution Terms
This is another crucial aspect of operating agreements. Dissolution occurs if the members want to dissolve an LLC. Dissolution terms assign responsibilities to every member whenever it may occur.
When defining the dissolution terms, ensure you include what happens to the LLC’s debt(s), members’ responsibilities, rules, and regulations, and how the company's remaining assets should be shared.
Step 5: Include a Severability Clause
A severability clause is used to protect the terms included in an operating agreement whenever a specific term is found to be unenforceable. Conflicts between members can occur and you want to make sure the terms of the agreement stand if one term is found to be unenforceable.
What Should Be Covered in an LLC Operating Agreement?
The main issues to cover in an LLC operating agreement relate to the rights and responsibilities of its members. They can vary depending on a few factors, including business industry, company needs, etc. Nonetheless, below are some common issues you should cover in your LLC operating agreement:
- Basic company information . Include the company’s legal name, address, name and address of your company’s registered agent, etc.
- Business purpose . This should include the product or service your company offers. Ensure you state that any product or service your offer is for lawful purposes.
- Statement of intent . Include what the company’s business purpose is.
- Duration of the LLC . Include how long the LLC is meant to last.
- Manager and member information . This should include the names, addresses, titles, responsibilities, and ownership percentage of all concerned persons.
- Members’ contributions . Include any capital or other types of contributions the members will make.
- Terms to exit or leave the LLC . Include how a member can leave the LLC and what happens with their stake.
- Dissolution terms . Include what happens if you choose to dissolve the LLC.
- Other terms . Other additional provisions include liability statements, dispute resolution , state law, special agreements, etc.
Here is an article on elements to include in an LLC operating agreement.
Can I Write My Own Operating Agreement?
Yes, you can write your operating agreement. The step-by-step guide above should guide you on how to write an LLC operating agreement. However, you may consider hiring an LLC lawyer to help you draft an operating agreement for your limited liability company.
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