An LLC Operating Agreement is a legal document that outlines how an LLC will be formed and terminated, describes the ownership and financial obligations, and highlights the duties of LLC members.
By setting working and financial relationships among managers and members of the Limited Liability Company (LLC), an LLC Operating Agreement sketches the company’s daily operations. It has prewritten rules for:
- Financial and functional decision-making,
- LLC management,
- Conflict settlement,
- LLC dissolution, and
- Leaving an LLC member by choice or otherwise.
So, we can define an LLC operating agreement as:
An LLC operating agreement is a legal document that contains customized terms and conditions from LLC formation to routine operations, conflict resolution to LLC dissolution.
An LLC Operating Agreement is also known as LLC bylaws or Company Agreement. It is similar to the Article of Incorporation of a corporation that outlines financial and functional decision-making in an organized manner.
LLC operating agreement is drafted according to the specific needs of its members and acts as a binding set of rules for LLC members to adhere to.
What is an LLC Operating Agreement for?
It elucidates how your company will be operated and dissolved. It defines members’ duties and contributions, documents day-to-day business processes, describes how disputes will be resolved, etc.
A well-drafted LLC Operating Agreement helps your business run smoothly, helps avoid any conflict, and provides an action plan for potential unforeseen circumstances.
Whether you have a single-membered or multi-membered LLC, an LLC Operating Agreement defines the rule from management to business termination. In short, an LLC operating agreement is the key to running your LLC smoothly and peacefully.
Do All LLCs require an Operating Agreement?
Although every state does not require you to operate your LLC under an Operating Agreement. However, certain states such as New York, California, and Missouri, need you to have an LLC Operating Agreement.
Moreover, you can adopt an Operating Agreement at any time, but to help guide all business decisions, it is generally best to make one at the very start.
In other words, if your state does not legally require you to adopt one, it’s always desirable to make a written agreement outlining business operations to avoid tensions and complications in the future.
What is the difference between Articles of Organization and an Operating Agreement?
Though both documents are crucial to forming and running an LLC smoothly, there are significant key differences in the Articles of Organization and Operating Agreements.
Article of Organization aka Certificates of Formation is the official document you file your LLC with the state to register your company as a legal business entity. If you form an LLC with an online legal service like Legalzoom, they file this document on your behalf at a fraction of the cost.
On the other hand, an LLC Operating Agreement is an internal document that highlights the ownership and roles of LLC members along with day to day operations of an LLC. You do not need to submit this document to the state.
How can I draft an LLC Operating Agreement?
An Operating Agreement is an important document containing details of the crucial procedures of your LLC.
If you pre-organize all the essential information, it will save you from unnecessary hassles. Following are some key points you should have in hand while drafting an Operating Agreement in your state:
i. Basic details of your LLC
- LLC name and address
- Registered agent details
- Formation date
- Number of members
ii. Members Details
- Members’ information such as names and contact details
- Member duties and voting rights
- Member’s contributions (capital, services, assets, or real property)
- Manager’s details, if applicable
iii. Accounting procedures
- Starting and ending date of a fiscal year
- How records will be kept
- Profit distribution details
iv. Other processes
- Voting procedures
- Management-related issues
- If a member leaves, dies, or is found incompetent, how LLC will be dealt
- How and when the LLC may be dissolved
Many LLC formation services such as ZenBusiness provide you with an Operating Agreement draft in their basic package for free. Moreover, you can opt for an add-on service or the package which offers to customize your LLC Operating Agreement.
After Drafting the Operating Agreement
As mentioned earlier, you do not need to submit the Operating Agreement to the state or any other office. However, some states require you to publish the notice of its formation and file initial reports. You can check such requirements at the Secretary of State website of your state.
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