ComplianceFebruary 21, 2020

What is an LLC Operating Agreement?

The Operating Agreement, also referred to as Limited Liability Company Agreement, is a contract between the members of an LLC, reflecting how a company will run internally from a financial as well as procedural standpoint. It is a private confidential document that is not disclosed to or filed with the State.

Interestingly, while an LLC Operating Agreement in the State of Delaware is required at the point of start-up, it does not have to be written. A verbal agreement is completely legal, but ill-advised, even for a single-member LLC.

A written Operating Agreement allows for the organization and planning of an LLC. It is a record to demonstrate that an LLC is separate from any personal assets. It is a document that can be presented to a bank when opening an account or applying for a loan. Also, it is a document that can prevent future misunderstandings that could stem from only a verbal agreement. Lastly, a well-written Operating Agreement will protect its members from State defaults which commonly call for monies and property gained and lost to be distributed equally which is problematic for a multi-member LLC.

The LLC Operating Agreement should address the following:

  • The identities of the members. That is simple as you only need to list the names and addresses of each.
  • The capital contribution of each member. What is the value in cash, property and/or service? How do the members plan to raise additional money?
  • The function/duties of each member: Will the company be managed by its' members or will it be manager-managed?
  • The purpose of the LLC. Why was the LLC formed?
  • How the LLC will be taxed: Will it be taxed as a disregarded entity, partnership or S Corp?
  • How the LLC deals with changes to members due to buyouts, divorce, death, bankruptcy, etc. Are there successors identified in cases where members can not continue with their duties?
  • Under what circumstances may the LLC dissolve?
  • How meetings are held and votes are taken. Are there periodic meeting requirements, and how many votes does each member have? Are the votes based upon the contribution of each member, or distributed equally?
  • How profits and losses will be distributed amongst the members.
  • Additional information may be included at the will of the members. Once signed, the Operating Agreement is a binding contract between the members and can be referred to in times of conflict.

As you can see, there are many important components to an LLC Operating Agreement to consider. While a verbal contract is legal, one can understand that having a written document that spells out who the owners are and how the business will be managed is absolutely crucial for the well-being of the company and its members.

CT Corporation can help you set the proper foundation for your LLC with our Corporate Kit. This kit includes an Operating Agreement template, a binder for company document storage, a corporate seal, and member certificates.