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What is an LLC Operating Agreement?

Just like any other legal document, an LLC Operating Agreement is a document that describes the member duties and the ownership of a Limited Liability Company. The working and the financial relations between the managers, members, and business owners are all set out in this agreement. Let us understand everything about this document in much more details.

What is in an Operating Agreement?

The contents and the form of the operating agreements usually vary a lot, but the main thing that most them would contain are Dissolution, Management and Voting, Membership Changes, Distributions, Capital Contributions, and Organization. Let us understand each section in-depth.

Article I: Organization

In the first section of the operating agreement, all the information deals with the company creation. The information includes the structure of the ownership, who the members of the company are, and when the company was created. And in case there are several members, each of them might have equal ownership or even separate amount of ownership “units.”

Here is a sample of what the section looks like from one of the Free LLC Operating Agreement Templates:

Section 1.1 – Company Formation and Duration

The Company has been established as a limited liability company (LLC) operated by the respective members. It shall initiate on the date when the Articles of Organization has been filed and shall endure till the Company one-day dissolves. And by the applicable law or this LLC Operating Agreement, the company would be dissolved after completion of the legal paperwork and its affairs are wound up.

Section 1.2 – Single Member

The member is the single member of the LLC and is the person who has the sole rights in the Company. This includes, but not limited to, the rights to manage the company affairs, the rights to vote and the rights to receive the distributions of the assets of the company.

Section 1.3 – Books and Records

The LLC shall sustain comprehensive and proper records and books of the affairs and business of the Company.

Section 1.4 – Amendment; Entire Agreement

The member has the rights to amend this LLC Operating Agreement at any time and for any reason. It also constitutes the entire agreement between the company and the member regarding the topic hereof.

Article II: Management and Voting

Under this section, all the details regarding how the members vote and how the company is managed are explained. The below points would give a better idea about this:

  • The Company can be operated and maintained by one or all managers or even the members that are appointed for it. The LLC Operating Agreement defines the authority that the members have over the business’ affairs.
  • The decisions of the Company can also be made via the voting process, only if the owners or board members choose this method. The votes can be earmarked amongst the members in different ways; for instance, one vote per unit of ownership interest (if it has been described in the Units’ terms), or one vote per member, etc. The LLC Operating Agreement would be able to define the number of votes that is needed for an action to be taken by the Company.

Here is a sample of what the section looks like from one of the Free LLC Operating Agreement Templates:

Section 2.1 – Member Management

The member shall manage the Company solely and would hold the title that this member chooses.

Section 2.2 – Voting

The member has one vote for any of the matters that needs voting on in the Company and that vote would be submitted as just one vote.

Section 2.3 – Member Authority

The sole authority and power of carrying out the affairs and the business of the company lie in the member’s hand. The affairs include, but are not limited to defend, prosecute, or commence any legal actions in the Company’s name; involving into contracts on behalf of the Company; involving in any financial activities on behalf of the Company, including borrowing money, closing, maintaining, or opening accounts, or the like; convey, encumber, or acquire personal or real property through any means or from any source; and carry on any other affairs for the business of the Company that has not been specified herein. As per this LLC Operating Agreement, the member has the rights to all mentioned above as far as it is not in violation of applicable law.

Section 2.4 – Indemnification

The member is not responsible for the obligations, debts, or acts of the company unless otherwise implemented by the law. The Company shall hold, defend, and indemnify the member naive against and from any liabilities, damages, costs, claims, and losses. This includes, and is not limited to amounts paid in settlement, fines, judgments, or expenses incurred by the Member in any investigative, criminal, or civil proceeding in which he/she is threatened to be involved or involved by cause of the management of, or membership in the company of the member.

Article III: Capital Contributions

Under this section of the LLC Operating Agreement, those members who have put money into starting the LLC are mentioned about. It also indicates the details regarding the additional money that would be gathered by the members and how they would do it. For instance, the LLC has the choice to issue the ownership “units” in trade for money.

Here is a sample of what the section looks like from one of the Free LLC Operating Agreement Templates:

Section 3.1 – Capital Contributions

The member will make or has made initial contributions to the assets of the Company, as per the Company records. And if the member figures that more capital is needed for the functioning of the company, the member may add the extra funds.

Article IV: Distributions

Under this section of the LLC Operating Agreement, the losses and profits of the company are discussed, including how it is shared amongst the members. This includes the physical property, money or any other business asset involved.

Here is a sample of what the section looks like from one of the Free LLC Operating Agreement Templates:

Section 4.1 – Allocations and Distributions

All or any losses and profits shall be allotted to the Member. Unless otherwise provided by applicable law, distributions can be offered to the member as defined here by the Member.

Article V: Membership Changes

Under this section of the LLC Operating Agreement, the procedure for removing or adding members is explained. Also, it defines when and if any member has the choice to transfer their company ownership. For instance, it is the duty of the company to define what would happen if two members divorce, a member goes bankrupt, a member dies, etc.

Here is a sample of what the section looks like from one of the Free LLC Operating Agreement Templates:

Section 5.1 – New Members

A new member or members can join after there is a majority vote for admitting the new member into the company and for issuing any additional membership benefits. Before being admitted into the company and as a term of admission, the new member must agree to become and be a member of the company and complete any document(s) needed by the Company. This member also has to agree to be obliged by the terms of the LLC Operating Agreement, that must be revised by the Member before any new member is admitted, to add in any conditions that would fit a multi-member LLC.

Section 5.2 – Transfers

The member has the rights to convey, pledge, encumber, assign, transfer, sell, or otherwise dispose of all or a part of the membership interest of the member in the company voluntarily. In such a case, the transferee is automatically admitted as the company’s new member subjected to the Section 5.1 of the LLC Operating Agreement.

Article VI: Dissolution

Under this part of the LLC Operating Agreement, the circumstances in which the company must be or may be dissolved (it is also known as “winding up” the company affairs) is explained.

Here is a sample of what the section looks like from one of the Free LLC Operating Agreement Templates:

Section 6.1 – Dissolution

On the consent of the member of the company, the company and its affairs shall be wound up. The company would have to terminate the affairs and business and has to begin winding up when the dissolution process begins, and has to complete the procedure as soon as possible. When the company is about to be wound up, the company assets must be distributed in a way compatible with the appropriate law.

Other Topics

Other than these six sections mentioned above, the LLC Operating Agreement might have any number of sections to discuss points related to the company and applicable by the law. The number of sections depends entirely on the situation of the company.

For instance, if a member wants to include the obligations for explaining how the conflicts within the organization would be controlled, restrictions on check signing, or periodic meetings. It must be kept in mind that the LLC Operating Agreement can be updated at any time during the business lifespan as per the member’s (your – the owner’s) choice.

Do You Require the LLC Operating Agreement?

If you are establishing your business in New York, Nebraska, Missouri, Maine, California, and Delaware, you are obligated to prepare and keep the LLC Operating Agreement for your business. However, if your state doesn’t require you to have the LLC Operating Agreement, it is strongly advised to have one:

  • In case, you are the only owner of the company (Single Member LLC): Designing an LLC Operating Agreement helps your LLC earn credibility and also helps to make sure that the court supports and sustains the limited liability status of the company.
  • In case you have many business partners (Multi-Member LLC): The LLC Operating Agreement would assist you in preventing any misunderstandings by establishing specific expectations concerning the partnering responsibilities and roles.

After Completing the LLC Operating Agreement

As soon as you have completed the LLC Operating Agreement, you would not need to file that same agreement anywhere else. You would need to keep it in your company records. Other than that, it is crucial to provide the copies of it to the other members of your LLC.

For any significant event that comes up regarding the company, it is highly recommended to consider reviewing and updating the LLC Operating Agreement, where it can easily be amended at any time with the approval of all the members.

Conclusion

The above-mentioned points and sections that might be a part of the LLC Operating Agreement are for informational purposes, and cannot be used as the actual document. There are many tax or legal consequences that have to be discussed with a professional accountant and attorney when preparing it and executing it. For the best outcome, hire an expert to help you with every step.

We know what a hassle it is attempting to create and file these forms on your own, so we’ve tried to simplify the process for you, for free. You can find more information at Free legal forms for operating businesses.