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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.
An Operating Agreement 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.
In addition, make sure your Operating Agreement is clear on these fundamental matters:
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.
*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.
There are 6 comments left for What Is an LLC Operating Agreement?Ken V said: Thursday, December 12, 2019
I own units in a Three Member Class Delaware LLC. There are A, B and C units. My Units are C provided by options that have vested as a former employee. The Board will not provide me with a copy of the LLC Agreement, however, they continue to tell me what rights I do not have per the Agreement. They are now saying since I am contesting the last 2 years audits they do not have to provide me with any financial information going forward and have instructed the auditors not to answer my questions. What parts of the Delaware Act override these issues. Thank you in advance for your help. KenHBS Staff replied: Friday, December 13, 2019
Ken, we are unfortunately unable to advise on legal matters. However, we can refer you to the Delaware LLC act Title 6, chapter 18-305 which discusses member rights: https://delcode.delaware.gov/title6/c018/sc03/index.shtml. We encourage you to consult an attorney to interpret how this may apply to your specific situation.Gustavo said: Wednesday, May 29, 2019
We made an operating l agreement when the LLC was created , and sent a copy to our bank informing who were the members certificate of formation - We change the members this year shoud we make new operation agreement including only the active members ? ThanksHBS Staff replied: Thursday, May 30, 2019
Gustavo, typically clients will update their operating agreement whenever there are ownership changes in the LLC. This document is not filed with us or with the state of Delaware. You may want to contact your bank and see if they require an updated copy of the agreement.Sebastian said: Monday, February 11, 2019
Would all members of an LLC need to have the same Operating Agreement, or can the Operating Agreement's T&C's be negotiated differently with each member?HBS Staff replied: Monday, February 11, 2019
Sebastian - In general, 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. If you have additional questions, feel free to chat with us. You may also want to consult an attorney for specific matter related to your LLC.Rosemary Remington-dec. Moore said: Saturday, November 3, 2018
Thanks so very much for the LLC package within my Rosemary Remington-dec. Moore Irrevocable Trust, a Delaware Statutory Trust. I am very much looking forward toward being in business more formally!HBS Staff replied: Monday, November 5, 2018
It was our pleasure to help you, Rosemary! Please let us know if you have any questions going forward.Marcus Franco said: Wednesday, March 28, 2018
Hi is it possible to change a delaware llc from a single member to manager managedHBS Staff replied: Thursday, March 29, 2018
Hello. Information such as the member(s) name, address and the percentage of the business owned is not required to be provided to the state of Delaware and therefore is not part of the public record. This information is kept on file internally within the LLC's Operating Agreement.
The LLC's Operating Agreement can be altered as needed by the members, without filing the changes with the state of Delaware. Some of the typical changes people make are the removal or addition of a member or the change in percentage of a member's ownership.
More details here: https://www.delawareinc.com/blog/change-of-ownership-for-an-llc/
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