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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 formation 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.
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.
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.
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
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.
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
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.
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.
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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:
- 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.
Meet some of our LLC Operating Agreement Lawyers
Pura Rodriguez, JD, MBA is the President and Managing Partner of A Physician’s Firm, based in Miami. She represents healthcare providers from different specialties in a broad range of issues, including contract review, business planning and transactions, mergers and acquisitions, vendor and contract disputes, risk management, fraud and abuse compliance (Anti-Kickback Statute and Stark), HIPAA compliance, medical staff credentialing, employment law, and federal and state regulations. She also assists providers in planning their estates, protecting their assets, and work visa requirements.
Jaclyn is an experienced intellectual property and transactional attorney residing and working in NYC, and serving clients throughout the United States and internationally. She brings a targeted breadth of knowledge in intellectual property law, having years of experience working within the media, theater, PR and communications industries, and having represented clients in the music, entertainment, fashion, event production, digital media, tech, food/beverage, consumer goods, and beauty industries. She is an expert in trademark, copyright, and complex media and entertainment law matters. Jaclyn also taught as an Adjunct Professor at Cardozo School of Law, having developed and instructed the school’s first Trademark Practicum course for international students. In her spare time, Jaclyn’s passion for theater and love for NYC keeps her exploring the boundless creativity in the world’s greatest city!
A bilingual attorney graduated from J.D. with a C.P.A. license, an M.B.A. degree, and nearly ten years of experience in the cross-border tax field.
Experienced and business-oriented attorney with a great depth of contract experience including vendor contracts, service contracts, employment, licenses, operating agreements and other corporate compliance documents.
With over 21 years of practice, Chet uses his vast experiences to assist his clients in the most efficient manner possible. Chet is a magna cum laude graduate of University of Miami School of Law with an extensive background in Business Law, Commercial Real Estate, Corporate Law, Leasing Law and Telecommunications Law. Chet's prior experience includes 5 years at two of the top law firms in Georgia and 16 years of operating his own private practice.
Steve Clark has been practicing law in DFW since 1980. He is licensed in both Texas and Louisiana state and federal courts. He concentrates his practice on business clients and their needs. He has been a SuperLawyer in Texas since 2011, and is Lead Counsel rated in Business Law. He is also a Bet the Company litigator in Texas.
I am a top-performing bi-lingual legal services professional with a proven record of success. Reputation of assessing and evaluating client’s needs and providing individualized solutions in line with those needs while efficiently handling multiple tasks simultaneously. Able to create a collaborative work environment ensuring business objectives are consistently met. Seeking an attorney role within a legal setting to apply skills in critical thinking, executive communications, and client advocacy.