An Operating Agreement for a Limited Liability Company (LLC) is a document that details the terms of the company, such as the financial and operational decision-making processes, as well as the rights and responsibilities of each member. Once signed by all LLC members, the agreement serves as a binding set of rules for them to follow.
The purpose of the LLC Operating Agreement is to allow owners to control the internal operations of the business according to their own rules and guidelines. Here is everything business owners need to know about this vital document.
Do I need an Operating Agreement for my LLC?
Operating Agreements for LLCs are only mandatory in California, Delaware, Maine, Missouri, and New York, though you don’t have to submit the document to the government. In such states where a written company agreement is not required by law, it is still recommended to ensure the proper functioning of your company.
This is because the LLC Operating Agreement clarifies important company processes, such as the distribution of profits and losses and the members’ authority to enter into legal contracts on behalf of the company. This can help reduce conflicts among members in a multi-member LLC and make anything said in good faith official for the company. A single-member LLC may also benefit from having an Operating Agreement, especially if the sole member relies on a manager to handle the company’s affairs.
If your business does not have an Operating Agreement, you will be subject to the default rules set by the state. These general rules may not be suitable for all businesses. It could result in unequal distribution of profits and losses or personal liability for partners. If your company operates as a sole proprietorship or a partnership, an agreement can protect partners from any personal liability. Additionally, any legal action taken against your company will be based on the provisions set forth by the state’s LLC code if you run without an LLC Operating Agreement. Having a company agreement gives you more control over the rules that govern your company’s management.
What does an LLC Operating Agreement include?
The Operating Agreement includes company information, such as the company’s name and industry, a description of the company’s services, and the main office address. It also states membership information, details of management, and operational processes of the limited liability company (LLC), including:
- The ownership percentages of each member
- The membership class, responsibilities, voting rights, and weights of members
- The management structure (including whether the LLC is member-managed or manager-managed) and duties and powers of members (including when new members can be admitted, when members can leave, and when members can compete against the company)
- The business tax classification, company’s fiscal year-end, distribution of profits and losses, and decisions about which reports to include in the annual report to members
- The procedures for holding meetings
- The rules for buyouts and transferring ownership for remaining members in the event of a member’s departure or death
You may also include details about which member can sign contracts on behalf of the company and methods used to resolve disputes in your Operating Agreement.
How Do I File An LLC Operating Agreement?
You don’t have to file an Operating Agreement with the government. Only your company’s Articles of Organization and annual reports need to be filed with the state. You should check your respective state law for LLC formation requirements.
How do I change the terms in an LLC Operating Agreement?
The terms of an LLC Operating Agreement can only be altered if all members of the LLC agree to and sign the changes in writing. Usually, the process for modifying the agreement is stated within the document itself.
Some LLCs may only allow changes if there is a unanimous vote from all members or only during specific periods. This is because certain actions or decisions may have a significant impact on the success of the LLC; hence, a stricter voting rule could protect the interests of all LLC members. In some cases, an LLC Operating Agreement cannot be amended at all.
If the process for amending the agreement is not clearly stated, the rules set by the state for LLCs will apply.
Frequently Asked Questions
Operating Agreements for LLCs are only mandatory in California, Delaware, Maine, Missouri, and New York. However, organizations in all other states are encouraged to have Operating Agreements to protect the LLC members
In states where an Operating Agreement is mandatory, you would need one regardless of the number of members. In other states, having one is not mandatory but is highly recommended, as it can protect the members from potential problems the LLC may face.
LLC Operating Agreements act as an official contract binding all members of the LLC to its terms once the document is signed by them.
The Articles of Organization, also called a Certificate of Formation in some states, is a mandatory document filed with the Secretary of State’s Office when registering a Limited Liability Company. An Operating Agreement is the document LLC members look to when they need to resolve issues or disputes within the company, and is not required by all states. A company cannot operate without filing the Articles of Organization.
On the other hand, the Operating Agreement outlines the details of the day-to-day operations and management of the LLC, whereas the Articles of Organization only provide basic information such as the name of the LLC, the names and addresses of members and managers, a registered agent, and their correspondence address.