While creating an operating agreement for your LLC (Limited Liability Company) is an important step to take to protect your business, the good news is that there are no costs to file an operating agreement, and only five states officially require it.
But the benefits of creating an operating agreement for your LLC are undeniable. Stick with us as we cover how an LLC operating agreement can help your business. We've also included all the pertinent details, state requirements, costs, and filing procedures.
What Is an LLC Operating Agreement?
An LLC operating agreement is a legal document that lays the foundation for the operations of the company.
Think of it as a written contract that puts into place the nature of the company and its structure and identifies the ownership and duties of each member(s) or manager(s). An operating agreement sets a path for business success and brings about clarity in operations, which could be extremely helpful if things get tough down the road.
Most states don't require you to officially file an operating agreement with them. It's an internal document that should be kept safely with all your other formation paperwork (Articles of Organization, Certificate of Good Standing, etc.). But there are plenty of reasons you should execute an agreement.
5 Ways Operating Agreements Benefit Your Small Business
An operating agreement for an LLC has many benefits that are even applicable to a single-member structure. Here's why you should consider taking time out to draft one if it's not explicitly ordered by your state.
1. Strengthens LLC Status
Having an operating agreement strengthens the limited liability status of your LLC so that it doesn't appear to be a sole proprietorship or partnership, leaving your personal assets, like a car, home, or savings, exposed to business liabilities. With a written-out agreement, you are creating a distinction between you and your business and, therefore, a separation of liabilities.
2. Reduces the Chances of Misunderstandings Between Members
You might have already decided verbally how the company will function with its members. But, these verbal agreements, even when made in good faith, can lead to confusion and be easily forgotten.
A written operating agreement sets clear expectations about each member's ownership percentage, role, and responsibilities and how profit will be divided amongst each. It ensures that everyone's interests and assets are protected.
3. Lays out Key Business Procedures
The operating agreement outlines how the company will function. It offers details like:
- Voting rights of members
- Procedure for conflict resolution and dissolution
- Schedule for member meetings
- Communication of key decisions
- Bookkeeping and tax preference
- Distribution of financials
Sometimes, it's the only document that mentions a succession plan if the primary member is having a hard time continuing the business. So be sure to cover who takes over in this instance.
4. Builds Credibility for Your Business
For many, proof of having an operating agreement for your LLC alludes to trustworthiness and can show that you, as an owner, are serious about your business. You have taken the added steps to ensure it's organized and running legitimately.
And don't forget: Many banks and startup fund platforms insist on seeing an operating agreement before allowing you to open an account or invest in your business.
5. Protects from Default State Laws
The majority of states have defined laws on how an LLC should operate. State laws can dictate how to change members, how profits get distributed, and what happens if the company is dissolved. These laws are typically vague, subject to change without prior notice, and might not align with your and your member/manager(s) business interests.
With an operating agreement for LLC, you are essentially bypassing state laws; you can refer to your operating agreement in case of any conflict instead of being at the mercy of state-stipulated laws.
How Much Does an Operating Agreement Cost?
There are no states that require a fee to file an operating agreement. If you are forming a business in one of the five states that do mandate one, you'll only pay the fee to file Articles of Organization, which is the document you submit to the state to form and register your LLC.
You can incur costs for an operating agreement if you choose to get legal help with drafting one or purchase an operating agreement template. You can certainly go the DIY (do-it-yourself) route, but chances are these avenues might not cover everything or be suited to your business's intentions and needs.
Getting legal expertise to draft a completely custom agreement can inflate your startup costs exponentially. A more affordable way of getting the right contract in place is by using a business formation service like Incfile. We have an LLC operating agreement template and can help you get yours created.
Which States Require LLC Operating Agreements?
Not all states mandate an operating agreement. In fact, most don't. But five states do require them — California, Delaware, Maine, Missouri, and New York.
How to File Operating Agreement in California
One of the most popular states for startups, California, actually requires an operating agreement. It's the second most important document after your Articles of Organization, sometimes called a Certificate of Formation.
The California Code of Conduct requires the operating agreement to be executed even for single-member LLCs, so you'll need one if you're the sole owner.
However, the state doesn't require the document to be filed publicly or be notarized. It needs to be kept safely alongside other important LLC records so it can be provided if ever requested.
How to File Operating Agreement in Delaware
Commonly touted as the state with the most business-friendly environment, Delaware does require all LLCs to have an operating agreement. This agreement can be entered either before or at the time of filing of formation paperwork, which costs $90.
This agreement could be written, oral, or implied. But legal and business experts always recommend owners have the operating agreement on paper.
Unlike other states, Delaware's LLC operating agreement doesn't need to list all of the members or managers.
How to File Operating Agreement in Maine
According to Maine Revised Statutes, every single LLC in the state needs to have an operating agreement.
One can form the operating agreement before or at the same time as the filing of the entity formation paperwork, which costs $175. If the agreement is generated later, the specific date of formation needs to be mentioned.
Tip: If you're forming the agreement alongside formation formalities, do a review of the state's governing laws on naming an LLC.
How to File Operating Agreement in Missouri
Missouri is one of the cheapest states to start a new business. The low taxes and nominal filing fees make it a favorite for many budding entrepreneurs. However, the state mandates that all LLCs have an operating agreement.
The agreement doesn't need to be filed with the Secretary of State or any other government agency. But, the agreement does need to mention if the LLC is member-managed or manager-managed.
There is no law requiring you to work with an attorney to draft an operating agreement — you can do it on your own. But legal jargon is tricky and you don't want to have any surprises in front of the court, especially if you're in a legal bind.
The contract experts at Incfile can help you draft an operating agreement in no time — making it easier for you to start your business.
How to File Operating Agreement in New York
Thinking of starting a business in New York? Just filing the Articles of Organization isn't sufficient. To officially be recognized as a legally operating LLC, all members of an LLC need to adopt and sign an operating agreement that will be legally enforceable.
New York has some of the most stringent requirements for the operating agreement. The agreement needs to be entered into before, at the time of, or within 90 days after the filing of the Articles of Organization.
The document doesn't need to be notarized or filed with the state. While the state law is silent on what happens if you don't have an operating agreement, it's a risk you don't want to take.
Operating Agreement FAQs
Are Operating Agreements for LLCs Legally Binding?
Yes, they are. Once the owner and all members sign the operating agreement, it becomes legally binding.
However, in the state of Delaware, the operating agreement is legally binding even if it's not signed by all members.
Does My Single-Member LLC Need an Operating Agreement?
Unless you're starting a business in California, Delaware, Maine, Missouri, or New York, your single-member LLC isn't required to have an operating agreement. As previously mentioned, there are multiple reasons why your LLC will benefit from executing an operating agreement regardless.
Can You Make Changes to an Operating Agreement?
You can modify your operating agreement to reflect changes as your business grows. Common reasons to amend the agreement include changes in:
- Membership (someone leaves, someone joins)
- Ownership percentage
- Voting procedure
- Profit distribution
But, the process to amend it should be mentioned in your original agreement. For example, can it be changed only if there's a unanimous vote or only during a certain time frame (fourth quarter meetings)? If your agreement doesn't outline amendment guidelines, then your state's default operating agreement guidelines will come into play.
Also, remember that if there are changes made to the members or nature of business, you'll have to update your Certification of Formation paperwork as well.
Is an Operating Agreement the Same as Articles of Organization?
No, they are not the same. Articles of Organization, also known as Certificate of Formation in some states, is the paperwork you file with the appropriate Secretary of State to register your LLC. Your LLC isn't created till you have submitted and paid for this.
There is an overlap between the two documents because they both ask you to list the purpose of the business and all member(s) details. However, as mentioned earlier, the operating agreement for your LLC will be a lot more detailed about how the company is set up and will function.
Solidify Your LLC Status with an Operating Agreement
Constructing an operating agreement (even if you're running the show alone) will cement your LLC status and provide the business with structure, clarity, and a path to follow if you ever stumble across some roadblocks. The agreement will also provide you with the peace of mind that your personal assets are protected.
If you are seeking to get an operating agreement in place, the experts at Incfile would be happy to help. We'll draft a custom agreement on your behalf once you provide us with some simple information on your LLC.