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LLC Operating Agreement

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What Is an LLC Operating Agreement?

A Limited Liability Company (LLC) operating agreement, also known as an LLC agreement, LLC partnership agreement, or operating agreement, is a legal document that establishes the relationship of the LLC members to one another. The LLC operating agreement details each member's rights and responsibilities. It outlines how these individuals will run the shared company together.

An LLC is a business entity that offers limited liability protection to its members. If a creditor pursues a collection on the business's debts, the LLC protects each individual member. This is different from a general partnership, in which the members are personally liable for the debts and responsibilities of the business. The LLC itself is not taxed. Rather, each member pays taxes on their share of the business's profits or losses based on that individual's personal income. It is worth noting that an LLC can elect to be taxed, and if it does, it is subject to corporate taxation.

Given LLCs are state-level entities, it is always recommended to always check state laws for any specific questions you may have regarding your LLC. This article offers general advice and guidelines, but seek out a corporate lawyer with experience in LLCs if you have any state-specific questions.

Components of an LLC Agreement

There are no formal requirements for the information included in your LLC Agreement. You should tailor this document to the unique needs of your business. However, the components listed below are typically included in some fashion.

Organization

This section specifies:

  • The name and address of the company
  • The date the LLC was created
  • Who the members are
  • The structure of ownership
  • A description of services or statement of intent for the business

Management and Voting

This part of the document details how the company is managed. You may have all members involved in the management or specify certain individuals who are responsible for various aspects of management. It's important to detail each individual's duties and specify their level of authority. You should also address how managers are elected, how long they serve, and what salary they are paid.

This section also specifies if and how voting will take place. If members choose to vote on decisions, you must determine how votes are allocated. You might give each member the same number of votes or distribute votes by ownership. The operating agreement should also specify how many votes are needed for a particular action.

In most cases, voting will take place at member meetings. Specify how often meetings will take place. Here is an article that explains how to hold a successful LLC meeting.

Capital Contributions

This section details:

  • Funds members have contributed to the company
  • Contributions of cash or services provided by members
  • Methods for raising future funds, including whether members may be required to contribute additional funding
  • Whether ownership units are awarded in exchange for funds

Distributions

Here, you will detail how profits and losses are distributed. You must specify the allocation of funds, physical property, and all other business assets. In most cases, members share in profits and losses in accordance with their percentage of interest in the company.

This section also details when profits are distributed. You should specify whether members can draw from their profits at will or if they're required to wait for a specified period. Take a look at this article to explore LLC ownership and profit distribution in more detail.

Membership Changes

Changes in membership may happen for a variety of reasons. This section of your LLC operating agreement should specify how you will handle all types of membership changes, including:

  • Adding new members
  • Transferring membership directly from an existing member to someone new
  • Whether existing members have the right of first refusal when another member sells their shares
  • The death of a member
  • The bankruptcy of a member
  • Divorce between members
  • What happens if a member becomes disabled
  • How a member can voluntarily withdraw
  • Actions that may justify the expulsion of a member
  • The process of expelling a member from the LLC

Dissolution

The final section will typically detail how the LLC may be dissolved. This details the circumstances in which you might dissolve the LLC and how you will allocate assets and conclude the company's affairs.

See LLC Operating Agreement Pricing by State

The Difference Between an LLC Operating Agreement and Articles of Organization

The articles of organization is a legal document that's required for the formation of an LLC. You must file this with the state to register the LLC as a formal business entity. You will file your articles of organization to establish the LLC initially. Your LLC operating agreement is an internal document that's drafted after the LLC has been formed.

What State To Establish Your Operating Agreement In

If you're operating a physical business, you must register your LLC and create all subsequent documents within the state where that business resides. However, if you are running an online company where the physical location isn't clearly defined, you may be able to form your LLC in a state other than the one where you live.

Each state has different requirements for LLCs, so you may want to investigate the differences if you have some flexibility in where you form your LLC. If you would like to register your LLC in another state, you must work with a Registered Agent residing in that state. The Registered Agent is either a member of the LLC or a third party who collects legal notices on behalf of the LLC. In some states, the Registered Agent must be a third party.

You must note the name of your Registered Agent on the LLC operating agreement. If you operate in multiple states, you do not need multiple operating agreements. Create your operating agreement for the state in which the LLC is registered.

Llc operating agreement

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What To Do With Your LLC Operating Agreement

Check with your Secretary of State's office for the legal requirements regarding your LLC operating agreement. Some states require that you file an initial report of the information or publish a notice of your LLC's formation. You do not need to file the LLC Operating Agreement itself anywhere, but you should:

  • Provide a copy to all members of the LLC
  • Keep the agreement in a file with other important business documents
  • Review and update the document any time you add or lose a member
  • Review the document annually for any necessary changes

The Benefits of an LLC Operating Agreement

An LLC operating agreement is required by law for all LLC's in:

  • California
  • Delaware
  • Maine
  • Missouri
  • Nebraska
  • New York

In other states, this document is not required, but it is strongly recommended. In an LLC with multiple business partners, the operating agreement provides essential operating guidelines that clearly define each member's role within the company. If you have sole ownership of your LLC, this document will give you greater credibility as a well-organized business and will give you greater legitimacy if you're called to uphold the status of your LLC in court.

Your LLC operating agreement can also help you override your state's default rules. Each state has a set of governing rules that your LLC must default to if you have not set forth different rules. For example, many states will have you divide profits and losses equally unless otherwise specified. However, if your members have contributed different amounts to the business, you may want to allocate profits and losses in accordance with their investments.

It's typically best to consult with a contract lawyer when you're preparing your LLC operating agreement. This ensures that all members' rights are protected and that the document is properly drafted to stand up in court should a dispute take place. You may also want to consult with a tax lawyer, particularly regarding the distribution of profits. Keep in mind that you can and should amend your LLC operating agreement as your company grows and changes. Keep this document up to date so that it always upholds the best interests of the company and its members.

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Business

LLC Operating Agreement

Idaho

Asked on Jan 7, 2022

Who do I submit my operating agreement to?

I understand that for a LLC for rental property, liabilty protection, an operating agreement is good. However, once this is completed, what do you do with the agreement to ensure your protected? Does it get filed with the State of the LLC or is it something that can just be filed away at home. It seems it would need to be filed or someone could just change the agreement at home dependent on any situation that came up to protect themselves better which seem like fraud.

T. Phillip B.

Answered Jan 11, 2022

The operating agreement is just one of the many things you need to do to show that you are treating this LLC as separate from you personally. With that being said, you will put the operating agreement into a records books with other things like your articles of organization, other government filings, membership ledger, etc. Then keep it at the primary place of business.

Read 1 attorney answer>

Contracts

LLC Operating Agreement

North Carolina

Asked on Apr 27, 2022

I have a established LLC need to setup operating agreement - what is estimate cost ?

I have a established LLC need to setup operating agreement - what is estimate cost ?

Cindy A.

Answered Jun 2, 2022

It depends on the industry and complexity of the purpose of the agreement.

Read 1 attorney answer>

Business

LLC Operating Agreement

North Carolina

Asked on Jun 21, 2022

I'm a real estate investor and entrepreneur looking to reorganize 2 businesses and a couple properties into 1 investment company. Is this something you can advise on?

I'm an investor and business owner with a few income producing assets that have me overwhelmed. I think consolidating everything into a holding/parent company might be the solution.

Holly T.

Answered Jul 5, 2022

Hi, Yes I can help with this.

Read 1 attorney answer>

Business Contracts

LLC Operating Agreement

Florida

Asked on Apr 20, 2023

What should be included in my LLC operating agreement?

I recently formed an LLC with two other partners and we are in the process of finalizing our operating agreement. I am looking for advice on what should be included in the agreement in order to ensure the legal and financial protection of all partners involved. I understand the importance of having a comprehensive agreement in place, and would like to ensure that all of our interests are properly represented.

Fabian G.

Answered May 26, 2023

Hello, My name is Fabian Garcia and I am a Florida-licensed attorney. What follows is a brief overview of certain important considerations when drafting an Operating Agreement: There are several items that need to be considered when drafting an Operating Agreement. First, you will need to determine whether your company will be manager-managed or member-managed. This is important because it will lay the foundation as to which individuals/entities will have the ability to control the company. Proper definitions should be used throughout the entire Operating Agreement to make sure that there are no ambiguities. Capital contributions are generally attached as an exhibit to the Operating Agreement, and describe the amounts that each member has contributed. Note that capital contributions can also be in the form of sweat equity. You will also want to make sure and address whether additional capital contributions will be required. Another item that must be touched on the Operating Agreement is membership. How will new members be admitted? Will a vote be required? Note that typically, members are not liable for the company's obligations by merely being members. There should be language addressing that as well. You will also want to make sure that there is a mechanism as to how members may dissociate from the company and whether the remaining members will have any buy-out rights. Next, the Operating Agreement should clearly address how profits and losses will be allocated. This goes hand in hand with how distributions will be made to the members, if any. Typically, if it is a manager-managed company, the manager will determine when the distributions must be made. All of the items which need to be voted on, along with the required voting percentages, need to be included in the Operating Agreement. The Operating Agreement should address whether the members will be able to transfer their membership interests in the company. Some third-parties may be considered permitted transferees. Additionally, the Operating Agreement should generally state that it will indemnify the members in the event of a lawsuit, under certain circumstances. Lastly, the Operating Agreement should always have a dispute resolution mechanism, indicating how disputes are to be handled. I routinely assist business owners by drafting Operating Agreements, along with other complex legal documents. Please let me know if I can ever be of assistance. Thank you.

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Securities

LLC Operating Agreement

Texas

Asked on Aug 24, 2021

Can an LLC buy stocks for a fee?

I'm forming an LLC in order to manage some money investing in the stock market, (Friends and family only) I will be charging a percentage fee on the profits. Can an LLC be formed to invest in stocks and charge a performance fee? Thank you.

Forest H.

Answered Aug 25, 2021

Generally, if you are "advising others regarding investment decisions for compensation" you are regulated by the SEC as an investment advisor and subject to oversight and registration with the SEC. There are exemptions, for example, a "Family Office" is not required to register. However, all investors and owners in a Family Office must be actual family and friends would be excluded.

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