What Does an LLC Operating Agreement Look Like? And What Does It Include?

0

What Does an LLC Operating Agreement Look Like? And What Does It Include?

Does every business have an operating agreement? What should the agreement include? And are LLC operating agreements legally binding? If you are looking for the answers to these questions, you're at the right spot. Let's explore operating agreements, what these important agreements look like and more.

Incfile | Operating Agreement

What Is an Operating Agreement?

Simply put, an operating agreement is a legally binding document that outlines how a Limited Liability Company (LLC) is organized and managed. It’s an internal document that is usually created upon business formation. An LLC’s operating agreement provides key details on the company, including ownership, management structure and the rules and laws that govern the business.

What If an LLC Has No Operating Agreement?

That all depends on where you live. Most states — with the exception being California, Delaware, Maine, Missouri and New York — do not require an operating agreement. However, each state has statutes and rules that outline how a business can operate. This includes, for example, the adding or removing of members. So the question is, do you want to create the rules that govern your business or have the state tell you what to do with your LLC?

If you do not want your business to follow the default operating statutes within your state, having an operating agreement on the books specific to your organization can override the state’s rules. This is especially helpful if there are internal issues within the company regarding members and their roles. Having an operating agreement will help settle such issues by providing a clearly defined set of guidelines.

What Does an LLC Operating Agreement Look Like?

Not all operating agreements are the same. They can each vary to be specifically tailored to a business. But for the most part, LLC operating agreements tend to cover the same bases. These are covered under “articles” and can use similar descriptions, including:

  1. Company Formation (or Organization)
  2. Capital Contributions
  3. Profits, Losses and Distributions
  4. Management
  5. Membership Compensation
  6. Bookkeeping
  7. Adding or Removing Members
  8. Dissolution

llc-operating-agreement-sampleIncfile's Operating Agreement template

What’s in an Operating Agreement?

Here’s a quick breakdown covering what you will need to provide when creating an operating agreement and how most operating agreements are organized.

ARTICLE I: Company Organization

  • Name of the LLC
  • Date of formation of the LLC
  • Business address
  • Registered Agent name and location
  • The purpose of the LLC
  • Terms of operation
  • Duration of the LLC
  • Names and addresses of the LLC members

ARTICLE II: Capital Contributions

  • Initial capital contributions from members
  • Additional capital contributions

ARTICLE III: Profits and Loss Distributions

  • Annual financial accounting on profits and losses
  • Tax and financial provisions
  • Distribution of funds

ARTICLE IV: Management

  • Management of the business
  • Member roles and responsibilities
  • Company records, including financial statements

ARTICLE V: Compensation

  • Management fees
  • Reimbursement

ARTICLE VI: Bookkeeping

  • Financial records and accounting method
  • Member accounts, including contributions, distributions and shares of loss
  • Reporting of company financials to members

ARTICLE VII: Transfers

  • Sale or assignment of a members' shares

ARTICLE VIII: Dissolution

  • When an LLC can (and cannot) be dissolved
  • Payment of debts
  • Distribution of assets

Types of Operating Agreements

Three of the most common types of operating agreements include single-member, multi-member and manager-managed. Though most of the information found in these agreements is uniform, there are additional clauses that highlight key differences in organizational structure and responsibilities.

Single-Member LLC Operating Agreement

Unlike the more complicated operating agreement used by a multi-member LLC, this first example applies to a business with only one owner. Having an operating agreement for a single-member LLC will outline the procedures followed by your organization, establish a separation of the business’s finances from those of the owner and outline what will happen to the business if the owner is unable to continue working.

Multi-Member LLC Operating Agreement

In addition to outlining the percentage ownership and membership of a multi-member LLC, the main purpose of this type of agreement will highlight how the members resolve internal disagreements on the running of the business, distribute capital (or share losses), handle the transition of membership (adding or removing) and the duties and responsibilities of the members.

Manager-Managed LLC Operating Agreement

Most LLCs are managed by a single-member or multi-members that are involved in the running of the business and share roles and responsibilities. However, when it comes to a manager-managed LLC, the authority to make decisions is delegated to the managers, which may or may not necessarily involve the members of the LLC. This type of operating agreement would work well if LLC members do not want to be involved in the day-to-day operations and responsibilities of the business and prefer taking a more passive role. The operating agreement here would delegate authority to managers. The exact roles of the manager(s) would be clearly outlined in the agreement.

Are LLC Operating Agreements Legally Binding?

LLC operating agreements are the rules and framework that will help guide your business, address issues and set a path to follow when it comes to the distribution of profits and losses and how to deal with conflict within the organization. Although an operating agreement does not need to be notarized, it is important to make sure the agreement is signed by all the members. Doing so will make the operating agreement legally binding.

The original document of the agreement should be kept safe and secure with the rest of your company’s important documents. You should also have digital copies of the agreement saved in a secure location as well.

Having an Operating Agreement for Your Business

An operating agreement provides business owners with a well-organized structure when it comes to taking care of issues that may arise within the LLC. If you need to make changes to your operating agreement, these will need to be approved and signed by the other members.

If you are starting your business and are ready to put together an operating agreement, our business formation specialists can help you write a customized operating agreement that will cover all the bases for your company. 

Our Business Formation Specialists Help You Write a Customised Operating Agreement For Your LLC. Included with Our Gold & Platinum Packages.

0
Paper List

Like What You're Reading?

Get fresh monthly tips to start & grow your LLC.

Related Articles

  • 32 Side Hustles from Home That Pay More Than $100 an Hour
  • 15 Items You Can Easily Flip for $100-$5,000 in Profit a Month
  • A Giant List of Self-Employment Ideas
  • 11 Out-of-the-Box Side Hustles for Women to Make an Extra $1,000 a Month
  • How to Pay Yourself as an LLC Owner
  • What Is an LLC? Super-Simplified Infographic
  • So You Moved? Follow This Guide to Moving Your LLC to Another State
  • If You're Not a U.S. Citizen, Can You Get an EIN for Your Business?
  • Understanding DBAs and How They May Be Beneficial to Your Small Business
  • 15 U.S. States with the Lowest State Fee to Start a Business Today
  • Are Non-U.S. Residents Allowed to Own a Corporation or LLC?
  • Need a Physical Address for Your Business?
  • 5 Virtual Address Services for Your Small Business
  • How to Create and File an LLC for Free
  • LLC vs. S Corp: Which Is Right for Your Business?
  • S Corp vs. C Corp: Differences and Benefits of Each
  • ​Do LLCs Get a 1099 During Tax Time?
  • Series LLC vs. LLC: Which One Do You Need?
  • PLLC vs. LLC: What You Need to Know
  • 7 Home Business Ideas That Double as Tax Write-Offs