An LLC Operating Agreement is one of the most important documents for any Limited Liability Company. While not every state requires one, having a comprehensive operating agreement is essential for protecting your personal liability shield, defining member relationships, and establishing clear business procedures. Without one, your LLC will be governed by default state rules that may not suit your business.
Begin by identifying the LLC's basic information: the company name, principal place of business, date of formation, and the state where it was organized. Include the purpose of the LLC, which can be stated broadly (e.g., 'any lawful business purpose') to give you flexibility. Also specify whether the LLC has a defined termination date or will continue indefinitely.
Define member contributions and ownership percentages. Each member's initial capital contribution—whether cash, property, or services—should be clearly documented along with the corresponding ownership interest. This section should also address whether additional contributions may be required and what happens if a member fails to make a required contribution.
Decide on your management structure. LLCs can be member-managed (where all members participate in daily operations) or manager-managed (where designated managers run the business). For multi-member LLCs, define voting rights, the percentage required for major decisions, and which decisions require unanimous consent versus a simple majority.
Profit and loss distribution is often the most negotiated section. While distributions typically follow ownership percentages, your operating agreement can specify a different arrangement. Consider how often distributions will be made, whether there will be mandatory distributions for tax obligations, and how losses will be allocated. Tax implications of different distribution methods should be discussed with an accountant.
Include provisions for changes in membership. Address how a member can transfer their interest, whether remaining members have a right of first refusal, what happens when a member dies or becomes incapacitated, and the process for admitting new members. These provisions prevent disruptions and protect existing members from unwanted outside parties gaining an interest in the LLC.
Dissolution and winding up procedures should be clearly defined. Specify the events that trigger dissolution (such as a unanimous vote, loss of all members, or court order), the process for liquidating assets, paying debts, and distributing remaining assets to members. Having clear dissolution procedures prevents costly disputes if the business needs to end.
Once drafted, all members should review the operating agreement carefully, ideally with legal counsel. Every member must sign the agreement, and copies should be distributed to all members and kept with the LLC's official records. Review and update the agreement periodically, especially when membership changes or significant business decisions are made.
