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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.
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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.
Image via Unsplash by officestock
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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Daniel D.
I was born and raised in Wayne, New Jersey and attended Seton Hall University, graduating cum laude. I followed my family down to Florida to attend Ave Maria School of Law where I graduated cum laude. I was admitted to the Florida Bar in 2018. During law school, I participated in the Certified Legal Internship program with the State Attorney's Office of the 20th Judicial Circuit and litigated 5 jury trials, 1 non jury trial and argued various motions before the court under the supervision of an Assistant State Attorney. I was an Assistant States Attorney for Collier County from 2018 to 2020 before moving into private practice in the areas of real estate and first party property from 2020 to 2021. As of November 2021, I started my own law practice that focuses on business planning, real estate and estate planning.
Tim E.
Tim advises small businesses, entrepreneurs, and start-ups on a wide range of legal matters. He has experience with company formation and restructuring, capital and equity planning, tax planning and tax controversy, contract drafting, and employment law issues. His clients range from side gig sole proprietors to companies recognized by Inc. magazine.
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Stan provides legal services to small to medium-sized clients in the New England region, and throughout the U.S. and abroad. His clients are involved in a variety of business sectors, including software development, e-commerce, investment management and advising, health care, manufacturing, biotechnology, telecommunications, retailing, and consulting and other services. Stan focuses on the unique needs of each of his clients, and seeks to establish long term relationships with them by providing timely, highly professional services and practical business judgment. Each client's objectives, business and management styles are carefully considered to help him provide more focused and relevant services. Stan also acts as an outsourced general counsel for some of his clients for the general management of their legal function, including the establishment of budgets, creation of internal compliance procedures, and the oversight of litigation or other outside legal services.
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Sam W.
Sam Widdoes has practiced law in California since 2014. He began his career as a litigation associate at a boutique firm in Los Angeles, and founded a production development company with a partner in 2017. Since then, Sam has served as the head of business and legal affairs at District 33, while working hand-in-hand with writers, directors and actors to develop, pitch and produce scripted and unscripted content. In that role, Sam produced the documentary series BLACKBALLED for Quibi/Roku, and will produce the upcoming documentary feature AS WE SPEAK directed by J.M. Harper for Paramount+/MTV, and the doc series THE BLACK BOX for MRC and XYZ Films. He is also the executive producer of an upcoming limited series with CBS TV starring Judith Light and Noah Wyle called SHADOWS IN THE VINEYARD, and a feature comedy for Spyglass Entertainment, among other projects. In early 2022, Sam opened WIDDOES LAW, APC, after recognizing a need for experienced legal services in the unscripted and documentary spaces. Since opening his own practice, Sam has advised producers, editors, directors and rights holders on a variety of agreement negotiations, including option purchase contracts, collaboration agreements and documentary producer deals. Sam also serves as production counsel for several documentary features, series and short films, and will draft, negotiate and advise on all legal aspects of the projects, including financing, production and distribution. Sam earned his Juris Doctor from The Catholic University of America, Columbus School of Law in 2013, where he graduated on the Dean's List and as a member of the Society of Trial Advocates. He holds a BA in journalism from the University of Richmond, and sits on the Board of Trustees at Turning Point School in Culver City, California. Sam is passionate about quality storytelling, and supporting those with the vision and drive to share their stories with the world.
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Robert D.
Robert is a skilled corporate lawyer, licensed to practice law in NY and DC. He has over 25 years of experience, with a focus on Venture Capital, Private Equity, M&A, General Business Law and Company Formation. Robert brings business side experience to every legal transactions. This allows him to shape a client's legal needs around its business goals to drive success in an effective and efficient manner.
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LLC Operating Agreement
Texas
Does a single member llc need an operating agreement?
I'm in Texas. I know operating agreements aren't required everywhere.
CRAIG C.
Texas has no requirement for an operating agreement. However, I generally advise all LLCs to have one. If nothing else, it assists as part of the "paper trail" in proving that the LLC was a separate entity from the sole member and helps to maintain liability protection.
Business Contracts
LLC Operating Agreement
Florida
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.
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.
Business
LLC Operating Agreement
North Carolina
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.
Hi, Yes I can help with this.
Business
LLC Operating Agreement
California
LLC and capital structure?
I am the founder and owner of a small business that is in the process of transitioning to an LLC. I am interested in understanding the capital structure of an LLC and how it differs from that of a sole proprietorship. I am looking for advice on how to ensure that my business is properly capitalized and structured in order to maximize its potential for success.
Russell M.
Well, putting aside the very important detail that an LLC offers limitation of liability and a sole proprietorship does not, the difference between a sole proprietorship and an LLC is that you can allocate the profits to others through membership interests. This means you can bring on one or more investors and allocate the capital appreciation, profit and cash flow to the investors with the same or different terms from your interest, and that you can share profits with employees through a "profits interest". There is a great deal of flexibility that you can use through a properly drafted operating agreement.
Contracts
LLC Operating Agreement
North Carolina
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.
It depends on the industry and complexity of the purpose of the agreement.
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Florida Operating Agreement
Location: Florida
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Doc Type: LLC Operating Agreement
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Texas LLC multi member operating agreement
Location: Texas
Turnaround: Over a week
Service: Drafting
Doc Type: LLC Operating Agreement
Number of Bids: 5
Bid Range: $395 - $1,600
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