An LLC Operating Agreement is a legal document that summarizes the function, structure, and rules of a business. It acts as a roadmap for the company, providing its members with a clear sense of direction for the near to long term on several key topics.
By reading a business’ operating agreement, one learns who the members are (and their ownership percentages), how the business will fund itself, its future plans, how profits and losses will be handled, each member’s voting rights, and the plans in place for emergencies and other unexpected events.
While some states mandate an operating agreement to be completed in order to file an LLC, it should be considered required due to the organization and increased efficiency it provides new and existing entities.
Required in: California, Delaware, Maine, Missouri, Nebraska, and New York.
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Rhode Island
- South Carolina
- South Dakota
- West Virginia
Definition: A legal document that lays the groundwork for an LLC, binding its founding members to a series of protocols and principles in relation to finances, management, ownership, and responsibilities.
An LLC Operating Agreement is a document completed at the onset of a Limited Liability Company. It allows the business’ founder(s) to create both a big-picture and narrowed look at the intricacies of the company. The members will look to the form before making any major decisions to see if it aligns with their goals, and if it fits within the rules they set for the company. It’s important to know that the agreement is not set in stone, but can be changed as the company grows.
There are two (2) major types of operating agreement: multi-member and single-member.
Multi-member LLC – A business contract for entities that will have two (2+) or more owners.
Single-member LLC – For entities that will have a single (1) owner.
A single-member LLC differs from a multi-member LLC in the following ways:
- Management – A multi-member LLC can be managed in one of two (2) ways: member-managed or manager-managed. A member can be an individual person, another LLC, or a corporation. If the LLC will be solely run by the business’ owners (and they’ll all be participating in running the company), the LLC will be member-managed. If the owners intend to recruit person(s) outside of the company, nominate one (1) or more of the owners as managers, or some combination of the two, they’ll create a manager-managed LLC. Single-member LLCs, on the other hand, have one single manager-owner.
- Taxes – Single-member LLCs are taxed as disregarded entities/sole-proprietorships – the owner must report all profits and losses to the IRS via the Schedule C. Multi-member LLCs are considered partnerships in the eyes of the IRS. Each member pays the equivalent taxes to their percentage of ownership in the company.
Both types of agreement:
- Are their own legal entities (separate from their owners);
- Are filed in a similar manner;
- Fall under the rules of the state; and
- Do not pay taxes (the members pay taxes).
Each state has its own requirements for naming an LLC. However, the majority have the following two (2) requirements:
- It must be completely unique from other names registered with the state; and
- It needs to end in: “Limited Liability Company”, “Limited Company”, “LLC”, or “L.L.C.”
Certain names, such as those that end with “bank”, “trust”, “credit union”, “insurance”, and so on commonly require additional fees, paperwork, and/or special approval.
A registered agent is a person that is responsible for receiving important documents regarding the entity. If someone were to sue the LLC, for instance, the registered agent would be the person served. They are also the designated receiver for official government-sent documents and other important messages. The registered agent must be a resident in the state in which the business operates. They ca
To make the LLC official, it needs to be filed with your state’s Secretary of State. Beware that your state may call the Articles of Incorporation by a different name. This can often be done online (see the state-by-state online filing). The information commonly required includes:
- Company name;
- Principal place of business;
- Mailing address;
- Registered agent information;
- Member name(s), title(s), and address(es); and
- The payment of a fee.
There are a host of options one can use for creating an LLC Operating Agreement. These include:
- Completing an attorney-drafted form through eForms (most recommended);
- Downloading and completing the free template (Download in PDF, Word, or ODT); or
- Hiring an attorney to draft the form (most expensive option).
An EIN (Employer Identification Number) is assigned by the IRS to business entities for tax administration purposes. A company can only have one (1) EIN. It is not a requirement for all businesses, but is a requirement if the LLC will be opening a business bank account, hiring employees, and filing certain tax returns. A complete list can be found by going to the IRS article Do You Need an EIN?.
- Apply online: IRS Online Application
- Eligibility: 1) Business must be in the United States and 2) the person that is applying for the EIN needs to have an SSN, EIN, or ITIN.
- Cost: Free
The annual report is also known as the: “Periodic Report”, Annual Statement”, “Statement of Information”, etc.
The state in which the LLC was filed requires it to file an annual report on a yearly (most common), bi-yearly, or per-decade, among other timeframes. The report ensures the LLC remains in compliance with state statutes and provides the state with up-to-date information on the company, including its members, registered agent, addresses, and more. If the annual report isn’t filed timely, the state may issue a fee. If too much time passes, the company will be dissolved by the state. Many states allow the annual report to be filed online. A fee may be required alongside the report, with some states charging a fee as high as $500.
While an operating agreement does not require a specific layout in order to be binding, there is a generally accepted format for structuring the contract, as outlined below. Additional sections can be added at the end or in between sections if deemed necessary by the company’s members. Regardless of the additions made, the space for the member(s) signature(s) should remain at the very end of the form.
This establishes the basic details of the company, as well as how it came into existence. The state and date in which it was founded, who the registered agent is, and the place of business should all be included.
If a multi-member LLC, this will include the full names of each member as well as their personal addresses. While optional, each member’s duties can be established to ensure everyone is clear on their roles within the company. This is commonly done if the LLC is member-managed instead of being manager-managed, as a manager-managed company can involve members being passive investors, instead of having actual day-to-day responsibilities.
The purpose statement can be specific or general depending on the requirements of the state. A general-purpose statement is a standard paragraph that states the company will be organized for a lawful purpose and will comply with all laws within the state it will operate in. be used (and is included in the free template). A specific purpose statement is commonly a one (1) to two (2) paragraph description of the primary purpose of their company. This should be a general outline of what service(s) and/or product(s) the company intends to provide for its clients and customers.
A capital contribution is an amount ($) given by a member to fund the company during the start-up stage. In return for providing money to the company, members can be given additional ownership in the LLC, often called “units” or “credits”. The term “share” is typically reserved for formal corporations. Each member’s ownership percentage should be stated near the beginning of the document. The percentage of all members needs to add up to 100%.
For multi-member LLCs, the operating agreement should include the process for voting on major decisions, who has the right to cast votes (and why), what majority is required for passing a vote, and what issues/decisions qualify for voting to take place.
A distribution is a share of profit that is delivered to a member at the end of the tax year. It is typically equivalent to their percentage ownership in the business. The agreement should state when and how distributions are made. The way an LLC distributes its profits is dependent on the way it opted to be taxed. In a single-member LLC, the owner can choose to be taxed as a sole proprietor or as a corporation. Multi-member LLCs have the option of being taxed as a partnership or a corporation.
Adding a clause dedicated to dispute resolution provides the members with an agreed-upon process for resolving arguments pertaining to the company. With arbitration, the members agree to have a pre-determined third party listen to both sides of the argument, and make a binding decision on the matter. The members are legally required to accept the decision made by the arbitrator. Mediation, on the other hand, involves a third party that listens to both sides of the argument, but instead of making a decision, they help the parties reach their own fair conclusion. While friendlier in nature, mediation can take a considerably longer time than arbitration.
Establishes the process for adding or removing a member from the LLC, when members can sell or transfer their shares, what happens if a member dies, and other member-related processes.
Provides guidance in the event the company is closed. When a company is dissolved, the remaining assets are distributed, the IRS is notified, a dissolution agreement is completed and signed by all members, and the final set of taxes are paid.
|Delaware||Title 6, Ch. 18|
|Georgia||Title 14, Ch. 11|
|Illinois||805 ILCS 180|
|Massachusetts||Title XXII, Ch. 156C|
|New Hampshire||§ 304-C:40 & § 304-C:41|
|New Jersey||§ 42:2C-11|
|New Mexico||§ 53-19-19|
|New York||§ 417|
|North Carolina||§ 57D-2-30|
|North Dakota||§ 10-32.1-13|
|Rhode Island||§ 7-16-22|
|South Carolina||§ 33-15-103|
|South Dakota||§ 47-34A-103|
|West Virginia||§ 31B-1-103|
Corporation & Business Entity Database
Prior to heading to Section 1 (Name and Principal Place of Business), the following information will need to be entered on the first (1st) page:
a. LLC Name
Write the name of the LLC. Entity names are commonly written in all-caps.
b. State Name + Date of Completing Op. Agreement
Enter the name of the state in which the LLC was registered, followed by the date (mm/dd/yyyy) the operating agreement is being filled out by the member.
c. LLC / Member Names
Here, the member completing the form will need to check whether or not the document is single-member or multi-member.
If “single-member” is checked, write:
- Name of the LLC;
- State it was formed;
- The name of the owner (member); and
- The member’s address.
If “multi-member” is checked, enter the full name of each member, followed by their address.
d. State Laws
Write the name of the state (again) in which the LLC was formed. This clause is confirming that the entity will be held under the laws of that particular state.
1. Name and Principal Place of Business
In this section, write the name of the LLC and the address it will operate out of. Even if the company is internet-based, it needs to have an address connected to the entity. Some owners make this their home address or rent a business mailing address from a coworking space (for example).
Enter the date the company was formed, and the name of the state it was formed in.
This is a general statement and does not need to be edited unless the member wishes to do so.
4. Registered Agent And Resident Agent
This section requires no input – it states that all information pertaining to the registered agent is contained in the Articles of Incorporation.
Like the last two (2) sections, this clause does not contain fields – it establishes that the LLC does not have an end-date, and will continue (starting from the date of filing), until terminated by its member(s).
6. Member Capital Contributions
If the LLC only has one (1) member, check the first box. If multi-member, check the second box and write the names of each member, followed by the cash (or cash equivalent) they provided to fund the entity.
Check “single-member” or “multi-member”. If a single-member LLC, the owner will withhold 100% ownership of the entity. If multi-member, write the names of each member, followed by their percentage ownership in the company to the right of their name. All percentages should add up to 100%.
8. Books, Records, & Tax Returns
Select “multi-member” or “single-member”. No other action is required for this section.
9. Bank Accounts
This section states that the company’s funds will remain in a company bank account (or accounts). No input necessary.
10. Management of the Company
Write the name in which the state the company will operate out of (same as before). Then, check one (1) or the two (2) boxes relating to whether it’s a single-member or multi-member entity.
If single-member: Write the name of the entity’s owner (your name).
If multi-member: Write the maximum amount ($) a member can borrow in a loan on behalf of the company, that a member can lend to another person or entity, or make a payment for a settlement, debt, and so on. There are two (2) additional checkable clauses if the LLC is a multi-member entity. These are regarding meetings and the assignment of a member’s interest in the company.
Following the two (2) optional clauses, there will be a second mandatory clause in which “single-member” or “multi-member” should be checked. This is in regards to the entity’s property, and how it is distributed to members. Following the required clause selection, there will be two (2) more optional clauses, named “Admission of New Members” and “Withdrawal Events”. These clauses are for multi-member entities only.
11. Dissolution and Liquidation
Place a checkmark in the box for either “single-member” or “multi-member”. No other information required.
12 – 16 (Multi-member optional clauses)
Sections twelve (12) through sixteen (16) are optional clauses that apply to multi-member LLCs only. If the members would like to include them into the operating agreement, a checkmark will need to be placed in the corresponding boxes.
If the business is a single-member LLC, check the box. This section refers to indemnifying the LLC’s owner, meaning they’re protected from having to pay out-of-pocket for actions they conducted on behalf of the company.
Write the name of the state that the entity is operating out of.
- The date (mm/dd/yyyy) the member(s) are signing the operating agreement;
- The name of the LLC;
- The printed name of the person that completed the operating agreement; and
- The signature(s) of all member(s).
The operating agreement is now complete. The original should be kept in a safe place, and a copy should be provided to all member(s). Even if revisions to the contract are made, the original operating agreement(s) should be kept instead of being overwritten.