An LLC Operating Agreement is a legal document that outlines the ownership and member duties 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.
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 deals with the creation of the company. It covers when the company is created, who the members are, and the structure of ownership. If there are multiple members, they may all have equal ownership or different amounts of "units" of ownership.
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 more have over company affairs.
- The company may choose to make decisions though a voting process. 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 amount of votes is required for particular actions by the company.
Article III: Capital Contributions
This section covers which members have given money to start the LLC. It also discusses how additional money will be raised by members. For example, an LLC can choose to issue ownership "units" in exchange for money.
Article IV: Distributions
This section provides how the company's profits and losses are shared among members. This might include money, physical property, or other business assets.
Article V: Membership Changes
This section decribes the process for adding or removing members. It also states if and when members can transfer their ownership of the company. For example, the company will want to specify what happens if a member dies, a member goes bankrupt, two members divorce, etc.
Article VI: Dissolution
This section of the operating agreement will explain the circumstances in which the company may be or must be dissolved. This 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. This depends on circumstances of a particular company. For example, members may wish to include requirements for periodic meetings, restrictions on check signing, or explain how disputes within the company will be handled. Keep in mind that your operating agreement can be updated at any time through a process of your choice.
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.
Once you have finished your operating agreement, you do not need to file it anywhere. Keep it for your records and give copies to the members of your LLC.
Following any major company event, such as adding or losing a 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 an 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.
To download: Upon logging into your account scroll through the tiles of your DASHBOARD page. Select the "Free Legal Forms" tile. Press download icon for "Free Sample Operating Agreement".