What Is an LLC Operating Agreement? [with templates]

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what is an llc operating agreement

What is an LLC Operating Agreement? 

The Delaware legislature created the limited liability company (LLC) in such a way as to allow the LLC's members the freedom to contract with one another upon whatever terms they deem are best suited to their company.

In a corporation, for example, Delaware law requires certain terms to be included in the corporation’s constituent document and mandates certain provisions related to corporate governance are followed; it also limits (to some extent) the ability of the parties involved to modify certain terms relating to voting or fiduciary obligations.

In an LLC, however, the members are free to organize the LLC in any manner they choose, with near-total freedom to define the relationship among the members as well as the terms governing the operation, oversight and maintenance of the LLC.

The fundamental terms of an LLC’s ownership, operation and management are set forth in its LLC Operating Agreement.

So what is an LLC Operating Agreement? It can be a written document or merely an oral understanding. A written agreement, however, is typically used because it memorializes the understanding and agreements between the members which, in the event of a future dispute or misunderstanding (or the unfortunate possibility of litigation), is invaluable protection for all parties involved.

Although each LLC Operating Agreement is different, it should generally set forth certain fundamental terms, such as:

 

  • The ownership percentage of each member
  • The manner in which profits, losses and expenses are allocated
  • The authority of members to bind the LLC and participate in day-to-day management
  • The voting rights of each member in making key decisions
  • The circumstances under which a member may withdraw from the LLC, and the way in which that member’s economic interest is calculated upon withdrawal
  • The ability of a member to sell or pledge his/her interest to a third party
  • The impact of the death or disability of a member
  • The circumstances and terms under which new members may be admitted
  • The circumstances under which the LLC will be liquidated, and the priority of claims among the members upon liquidation
  • Indemnification rights (if any) in the event the LLC (or a member) is sued in connection with the LLC's business

 

What Are The Benefits of a Delaware LLC?

There are numerous benefits to a Delaware LLC. One of the most popular aspects is that the state of Delaware does not require a Delaware LLC's Operating Agreement to be filed or made public, as some other states do; thus your Delaware LLC's Operating Agreement remains completely private among you and your fellow LLC members.

A Delaware LLC is typically formed by filing a Certificate of Formation with the state, which includes only the name of the LLC and the office of the Registered Agent, which allows all the members of your LLC to remain private. 

Feel free to utilize this free template of a single member LLC Operating Agreement.

Here is a free template for a multi-member LLC Operating Agreement.

 

 

 

More By Brett Melson

There is 1 comment left for What Is an LLC Operating Agreement? [with templates]

Stephen Bertsch said: Monday, March 27, 2017

Thanks as this blog was very educational and helpful!

HBS Staff replied: Monday, March 27, 2017

So glad you enjoyed it! Thanks for letting us know.

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