What Does an LLC Operating Agreement Do?

What is an operating agreementWhat exactly does the LLC Operating Agreement cover? In a word: Everything. The operating agreement is the reason for the unrivaled popularity of the Delaware LLC. It is the architect of the LLC's famous flexibility. It is the reason why maintaining and managing an LLC is easy. Company ownership, membership, management, day-to-day responsibilities and other items are all stipulated in the Operating Agreement.

First, the basics:

  • Admitting new members to the LLC is handled in the agreement. This may include paid-in capital, duties, percentage of ownership and more.
  • Removing members from the LLC is handled in the agreement. This includes the exit plan, buyout and successors.
  • Spelling out ownership percentage is handled internally via the LLC agreement. LLC ownership is divvied up by percentage, generally, but ownership can also be done using units.
  • Adding a member, removing a member or adjusting the ownership of current members. The reallocation of ownership percentages in an LLC is handled internally via the LLC agreement.
  • Handling of profits/losses, how they’re distributed and to whom and how it’s taxed.
  • Paying bills. This could include payroll, paying the rent/mortgage, utilities, insurance, paying vendors, Delaware Franchise Tax, and Registered Agent fees, etc.
  • Detailing the management of the LLC and who handles day-to-day responsibilities; who runs the show, who manages the office, who mans the storefront, who covers the warehouse, who goes out in the field, for example.

A secondary level may include more obscure, often overlooked items that can be addressed in the LLC Agreement:

  • What happens in the event that there is a dispute between the members? Who has the power to decide?  How does it get resolved?
  • What happens if members cannot come to an agreement and they decide to go different ways? Who goes and who stays? Who ultimately has the final say?
  • What happens if a member passes away?

Having an LLC agreement in place that covers everything, big and small, means you’re not shooting from the hip come crunch time.

For more information, please read our post on key items to include in your LLC Operating Agreement.

If you have any questions about forming your new Delaware LLC give Harvard Business Services, Inc. a call today. You can email us at sales@delawareinc.com or call me directly at 800-345-2677 ext. 6133. 

*Disclaimer*: Harvard Business Services, Inc. is neither a law firm nor an accounting firm and, even in cases where the author is an attorney, or a tax professional, nothing in this article constitutes legal or tax advice. This article provides general commentary on, and analysis of, the subject addressed. We strongly advise that you consult an attorney or tax professional to receive legal or tax guidance tailored to your specific circumstances. Any action taken or not taken based on this article is at your own risk. If an article cites or provides a link to third-party sources or websites, Harvard Business Services, Inc. is not responsible for and makes no representations regarding such source’s content or accuracy. Opinions expressed in this article do not necessarily reflect those of Harvard Business Services, Inc.

More By Andrew Millman
Leave a Comment
* Required
* Required, will not be published