Table of Contents
- Download a Limited Liability Company (LLC) Operating Agreement Template
- The Basics: What is an LLC Operating Agreement?
- When an LLC Operating Agreement is Needed
- The Consequences of Not Having One
- The Most Common Situations For Using This Document
- What Should be Included
1. Download a Limited Liability Company (LLC) Operating Agreement Template
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2. The Basics: What is an LLC Operating Agreement?
An LLC Operating Agreement is an internal written document among members of a Limited Liability Company (“LLC”). An LLC is a business structure for companies that combines the legal benefits of a corporation with the tax benefits of a partnership or sole proprietorship. Many states do not require Operating Agreements, but the formality is highly encouraged since an Operating Agreement distinguishes the company as an LLC and not a sole proprietorship or partnership. An LLC further prevents disagreements by defining each owner’s responsibilities and clarifying how decisions and profits will be distributed internally.
A simple LLC Operating Agreement will identify the following basic elements:
- Binding Authority: which people have authority to sign contracts for the company.
- Duties: the powers of each member and manager of the company.
- Meetings: the frequency of meetings to be held and attended by members each year.
- Members: the names of each person who owns the company and how new members may join or old members leave to make internal transitions smoother.
- Ownership: the percentage of each member’s share of the company, often based on the capital contributions or money each person gives.
- Term: how long the company will exist or when it should be dissolved or continued.
- Transferring Interest: how members can buy or sell their interest in the company.
- Voting: whether a majority vote or unanimous consent is required from members on certain decisions that impact the company.
The U.S. Small Business Administration provides a helpful overview of Operating Agreements.
As a reference, people often call this document by other names:
- Operating Agreement
- LLC Agreement
- LLC Bylaws
- LLC Setup Agreement
LLC Operating Agreement PDF Sample
The sample LLC operating agreement below details an agreement between the two members of ‘ABC, LLC.’, ‘Kenneth A Wenger’ and ‘Hattie J Stamps.’ The two members agree to the how the LLC will be run, including membership rights, allocation of profits and losses, what to do with salaries and expenses, and other important terms.Limited Liability Company (LLC) Operating Agreement
3. When an LLC Operating Agreement is Needed
A written Operating Agreement protects the company’s limited liability status by proving that the LLC is a separate legal entity. In other words, the personal property of each member or owner of the LLC is separated from the debts of the company. Without written documentation of an Agreement, the company may appear to be a sole proprietorship or partnership for tax and legal purposes.
Even though your state may not require an Agreement, a written document can help clarify the company’s internal management procedures and operations.
4. The Consequences of Not Having One
Your state’s default LLC rules will apply if you do not have an Agreement. For example, if you do not detail what happens if a member of the company leaves or passes away, the state may automatically dissolve your company based on its laws. If you want something different than your state’s de facto laws, an Operating Agreement allows you to retain control and flexibility on how the company should operate.
Banks, lenders, investors, and professionals will often ask for an Operating Agreement before allowing the company to open a business checking account, secure financing, receive investment money, or obtain proper legal and tax help.
Here is a chart of some of the consequences individual members and the LLC may face if there is no written Agreement.
Members of the LLC own a percentage of the company, not shares of a corporation.
5. The Most Common Situations for Using This Document
Individuals that want more control over how their companies are operated on a day to day level and managed on a long term strategic level should invest in an Operating Agreement. For instance, state default rules often assume that each owner has an equal share of the company even though they may have contributed different amounts of money, property, or time. If you want something different than the default, an Operating Agreement allows you to specify distributive shares (65% ownership entitles you to 65% of profits and losses) or make special allocations (50/50 ownership but you are allocated 65& of profits and losses).
For tax purposes, most joint ventures established in the U.S. are formed as LLCs. If you are looking to create your LLC as a joint venture, then you might also need a joint venture agreement.
6. What Should be Included
A simple LLC Operating Agreement should generally have at least the following:
- Who owns the company based on the contributed money, property, or time.
- What should happen if one member passes away or wants to leave the company.
- Where the company’s principal place of business is located.
- Why only certain individual members can sign contracts on behalf of the company.
- When the members must meet to discuss the company’s affairs and how regularly.
- How the profits and losses of the company will be distributed among the members.
Here are some other useful details a this document might include:
- Amendment: any changes to the Agreement must be in writing to be valid
- Dissolution: when and how the company will be dissolved or ended, including how much each member will get paid based on their ownership percentage or contributions
- Contributions: the amount of money, property, or services each owner gives in the beginning and may be asked to give more in the future
- Profits & Losses: how will the money earned or lost be allocated and distributed among each member, either based on ownership percentages or different financial needs or tax brackets of the members
- Duty of Loyalty: whether the members of the company may invest in competing businesses or whether they are required to share business opportunities with the company
- Indemnification: the company will defend the members from any legal claims unless the member committed gross negligence or willful misconduct
- Liability: the individual members are not on the hook for the mistakes of the company or other members unless there was intentional wrongdoing
- Life Insurance: the company may buy life insurance for its members to reduce the capital gain taxes that may be due when the member’s interest is sold at the time of death
- Managers: which member(s) or non-members are responsible for managing the company and how they will be compensated
- Prohibitions: members of the company may not violate the terms of the LLC Operating Agreement, including giving their authority to a non-member
- Voting: which decisions require a majority vote or unanimous consent from the members, either each member gets one vote — “per capita” voting — or each member’s voting power is based on their ownership interest in the company
- Management Fee: how much the manager(s) should be paid for their services
- Reimbursement: whether the company will reimburse managers or member for out-of-pocket expenses incurred in managing the company
- Accounting: generally accepted accounting principles (GAAP) will be used to keep an accurate and complete record of the company’s accounts
- Annual Report: a report of the company’s financial condition will be provided each year
- Auditing: members can request the company accounts be examined
- Records: accurate records and information about the company will be maintained and members of the company may request a copy
- Tax: the LLC is treated as a partnership for federal and state income taxes
- Tax Matters Partner: one member will represent the LLC before the IRS on tax matters
- Valuation: an independent accounting firm may conduct a fair market value appraisal of the company’s assets and liabilities if a value of the LLC is needed
- Buyout: whether other members of the company have the right to buy another member’s interest in the company if they leave for any reason