An LLC operating agreement is a legal document that summarizes the function, structure, and rules of a limited liability company. 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.
Required in: California, Delaware, Maine, Missouri, Nebraska, and New York.
Regardless of a state’s requirements, creating an operating agreement at the onset of an LLC is highly recommended due to the organizational and structural benefits they provide.
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Rhode Island
- South Carolina
- South Dakota
- West Virginia
There are two (2) major types of LLC operating agreements: multi-member and single-member.
Multi-Member LLC – A business contract for limited liability entities that will have two (2+) or more owners.
Single-Member LLC – For entities that will have only one (1) owner.
An LLC operating agreement establishes the fundamental guideline and operational procedures of a newly formed company. It allows the business’ founder(s) to outline both the short- and long-term plans of the entity. Having a clear game plan makes navigating the inevitable hurdles that face startups significantly easier. It’s important to know that the agreement is not set in stone, but can (and should) be altered to match the company’s visions and goals as it grows.
- 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’s 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 Schedule C (Form 1040). 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.
- Separation – Are their own legal entities (separate from their owners).
- Filing – Are filed in a similar manner.
- State Law – Fall under the rules of the state.
- Taxes – Do not pay taxes (the members pay taxes).
- Check Name Availability
- Identify the Registered Agent
- File the Articles of Incorporation
- Create the Operating Agreement
- Obtain an EIN (Optional)
- File the Annual Report (Ongoing)
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,” etc., commonly require additional fees, paperwork, or special approval. Members should use their state’s Secretary of State entity database to cross-reference possible LLC name options.
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 documents and other important communications. The registered agent must be a resident of the state in which the business operates.
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 (click on one of the states above to learn how to file). The information required by most states includes the following:
- Company name
- Principal place of business
- Mailing address
- Registered agent information
- Member name(s), title(s), and address(es)
- The payment of a fee
There is a vast number of ways to create an LLC Operating Agreement, including the following options:
- Completing an attorney-drafted form only through eSign (most recommended).
- Downloading and completing the free template either on the computer or by hand (download in PDF, Word, or ODT).
- 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 it 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) The business must be in the United States and 2) the person that is applying for the EIN needs to have their own SSN, EIN, or ITIN.
- Cost: Free
The annual report is also known as the “Periodic Report,” “Annual Statement,” and “Statement of Information,” among other titles.
The state in which the LLC was filed will require that the LLC file an annual report on an annual basis (most common), although sometimes it could be bi-annually, 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 in a timely manner, the state may charge 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 $500.
While an operating agreement does not require a specific layout in order to be legally binding, there is a generally accepted format for structuring the contract, as outlined below. Additional sections can be added at the end or in between sections if deemed necessary by the company’s members.
- Name & Formation
- Members & Duties
- Capital Contributions & Ownership
- Voting Rights
- Arbitration & Mediation
- Membership Changes
This establishes the basic details of the company, as well as how it came into existence. The date of creation, as well as the state in which it was founded, are required. Furthermore, the name of the registered agent and the place of business should also be included.
If the entity is a multi-member LLC, the members and duties section will include the full names of each member as well as their personal addresses. While optional, each member’s duties can be established to ensure everyone clearly understands their roles within the company. This is commonly done if the LLC is member-managed instead of being manager-managed, as a manager-managed company can involve members being passive investors, instead of having actual day-to-day responsibilities.
The purpose statement can be specific or general depending on the requirements of the state. A general purpose statement is a standard paragraph that states the company will be organized for a lawful purpose and will comply with all laws of the state in which it operates. A specific purpose statement is commonly a one (1) to two (2) paragraph description of the primary purpose of the company. This should be a general outline of what services or products the company intends to provide for its clients and customers.
A capital contribution is an amount ($) 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 ownership percentage of 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. For single-member LLCs, 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 considerably longer 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 procedures.
Provides guidance in the event the company is shut down. 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 taxes are paid.
The following table contains links to each state’s operating agreement statutes or general LLC laws.
Use the links below to look through a state’s database of corporations. It’s useful for finding out if a business name has already been taken by another entity.
Prior to heading to Section 1 (Name and Principal Place of Business), the following information will need to be entered at the top of the first (1st) page:
- LLC Name – Enter the name of the LLC. Entity names are commonly written in all caps.
- State Name & Date – Enter the name of the state in which the LLC was registered, followed by the date (mm/dd/yyyy) the operating agreement is being completed.
- LLC / Member Names – Select “single-member” or “multi-member” to indicate the type of LLC being created.
- If “single-member” is checked, enter the following information:
- Name of the LLC.
- State it was formed.
- The name of the owner (member).
- The member’s address.
- If “multi-member” is checked, enter the full name of each member followed by their address.
- If “single-member” is checked, enter the following information:
- State Laws – The name of the state in which the LLC was formed will need to be entered once more to confirm which state laws will govern the entity.
1. Name and Principal Place of Business
In this section, enter 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. For example, some owners make this their home address or rent a business mailing address from a coworking space.
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 hold 100% ownership of the entity. If multi-member, write the names of each member, followed by their percentage of 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 is necessary.
10. Management of the Company
Write the name of the state the company will operate out of (same as before). Then, check one (1) of the two (2) boxes to indicate whether it’s a single-member or multi-member entity.
If single-member: Provide the name of the entity’s owner.
If multi-member: Provide 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 in regard to 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 where “single-member” or “multi-member” should be checked. This is in regard 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 is required.
12 – 16. Multi-Member Clauses (Optional)
Sections twelve (12) through sixteen (16) are optional clauses that apply to multi-member LLCs only. If the members would like to include them in the operating agreement, a checkmark will need to be placed in the corresponding boxes.
If the business is a single-member LLC, select the sole checkbox under section 17. 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.
Enter the name of the state that the entity is operating out of.
The following information will need to be entered into the appropriate fields at the bottom of the last page:
- 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.
- The signature(s) of the 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.