What is an LLC Operating Agreement?
An LLC Operating Agreement is a legal document that outlines the ownership and operating procedures of your Limited Liability Company. This agreement allows you to set out the financial and working relations among business owners (“members”) and between members and managers
This article covers the following topics:
Check out our Free Sample Operating Agreement, included in this article, that you can use for your LLC.
LLC's in California, Delaware, Maine, Missouri, Nebraska, and New York are legally required to have an operating agreement.
Even if an Operating Agreement is not required in your state, it is strongly recommended to have one:
- If you have business partners (Multi-Member LLC):
An operating agreement will help prevent misunderstandings by setting clear expectations about partner roles and responsibilities.
- If you are the sole owner of an LLC (Single Member LLC):
Creating an operating agreement brings credibility to your LLC. This helps to ensure courts uphold limited liability status of your LLC.
The form and contents of operating agreements vary widely, but most will contain six key sections: Organization, Management and Voting, Capital Contributions, Distributions, Membership Changes, and Dissolution.
Article I: Organization
The first section of the operating agreement generally deals with the creation of the company, specifying when the company is created, the identity of the members, and the manner of ownership. If there are multiple members, the operating agreement may provide that the ownership interests of all members are equal or that the ownership of the company is to be determined by a number of ownership “units” held by each member.
Article II: Management and Voting
This section addresses how the company is managed and how the members vote.
- The company may be managed by the members or by one or managers that are appointed by the members, and the operating agreement specifies what authority the members or managers have over company affairs.
- Applicable law and the operating agreement may provide for matters to be decided by votes of the members. Votes may be allocated among the members in any number of ways, including one vote per member, one vote per unit of ownership interest (if the company ownership is described in terms of units), etc. The operating agreement may specify what threshold of votes is required for particular actions by the Company.
Article III: Capital Contributions
This section discusses how the company generates money from its members, and often includes provisions for an initial capital contribution by the members and may contain provisions for additional capital to be raised later by contribution from the members (sometimes called a capital call) or through the issuance of membership interests to new or existing in exchange for additional capital.
Article IV: Distributions
This section provides how the company’s profits and losses are allocated amongst the members, and when the company makes distributions of money or property to the members.
Article V: Membership Changes
The operating agreement should specify if and when any new members may be admitted, and if and when any members may transfer their interest to other parties. For example, the company may wish to issue new ownership interests to a new member to raise additional capital, and the members may wish to specify what happens if a member dies, becomes incapacitated, or becomes party to a divorce, bankruptcy, or receivership proceeding. In this section, the operating agreement may also address if and when any members may withdraw or be expelled from the company.
Article VI: Dissolution
This section of the operating agreement will explain the circumstances in which the company may be or must be dissolved and the affairs of the company concluded, which is sometimes called “winding up” the affairs of the company.
In addition to these six key sections, operating agreements may address any number of other topics, which depends on circumstances of a particular company. For example, members may wish to include requirements for periodic meetings, restrictions on check signing, provisions for an alternative dispute resolution, or ADR (providing that disputes should be subject to mediation, facilitation, or arbitration, in an effort to avoid costly and public dispute resolution through the court system), and the like.
An operating agreement is an internal company document. You do not need to file it with any state or government agency, regardless of where you form your LLC.
Distribute a copy to all key members and management personnel and store a copy in a safe place along with the rest of your important business documents.
Following any major company event, such as the departure or addition of a new member, it is a good idea to review and consider updating the operating agreement. An operating agreement can always be amended with the consent of all current members.
Use our free template to create a operating agreement for your LLC.
Download a Free Sample Operating Agreement
Create a free account to download our operating agreement. Please keep in mind that this operating agreement is only meant as a reference.
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