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The LLC Operating Agreement sets forth the limited liability company structure; it is the main governing document of the LLC, above all others.
The Delaware legal premise known as freedom of contract gives the organizers of an LLC, who construct the Operating Agreement, enormous flexibility in defining the rights and responsibilities of the LLC members. This means the Operating Agreement allows you to create an entity as well as define the relationship among its members as you see fit for your unique situation.
Since the Operating Agreement is a contract, it must be agreed to by all participating parties. While Section 18-101 of the Delaware Limited Liability Company Act states that a limited liability company Operating Agreement may be "written, oral, or implied," typically people write out the Operating Agreement and have it signed before a notary public, with a copy of the notarized document provided for each signer.
Business partners or investors in the first stages of an exciting business opportunity often do not foresee (or do not consider) the possibility of a later disagreement and the potential need to assert their respective rights, but putting the terms governing the operations of an LLC in writing at an early stage protects the interests of everyone involved.
Once implemented, the Operating Agreement remains in force until amended or changed by the unanimous consent of the LLC members, unless the Agreement itself states an expiration date.
Your Delaware LLC Operating Agreement is your company's personal property and is not required by us nor by the state of Delaware to be filed publicly.
Typically, the IRS also does not require that you publicly file your LLC Operating Agreement with your annual tax forms, or to obtain an Employer's Identification Number (EIN); however, a bank may require a copy of the LLC Operating Agreement and an EIN if you wish to open a bank account for your LLC.
You may form your LLC before you have established an Operating Agreement, or you may write an Operating Agreement and then form your Delaware LLC. Either is permissible.
Single-member Delaware LLCs are not required to have an Operating Agreement but most attorneys recommend using a single-member LLC Operating Agreement.
There are provisions you can build into a single-member LLC Operating Agreement that protect the member beyond the liability protection outlined in the Delaware code. A legally executed LLC Operating Agreement becomes very important if the sole member of an LLC dies.
Multi-member Operating Agreements are most applicable to manager-managed and member-managed LLCs. In the case of member-managed LLCs, the multi-member Operating Agreement typically puts the members themselves in charge of the operation of the LLC.
The LLC owner (or owners) may customize this document to assign specific, unique responsibilities to each member, or to require members to accept certain rights and responsibilities. This Agreement is often used in family businesses, joint ventures between companies and investment vehicles for groups of investors.
In manager-managed LLCs, the multi-member Operating Agreement establishes the operation of the company to be led by a single manager who is member-selected.
You may decide to elect, appoint or contract with a manager for these services. You may also set in the Operating Agreement any limitations on the manager you deem appropriate.
By dividing members into different classes, you can assign unequal rights and responsibilities to separate groups of members. A multi-class Operating Agreement can be customized to include the names of the specific members in each class as well as their designated rights.
This type of Operating Agreement is often used in estate planning or succession planning, and specifically outlines the relationship of the member classes and their obligations and responsibilities.
Delaware is known for its unique series LLC, which was devised by some of Delaware's top lawyers.
Provisions in Delaware law allow Delaware LLCs to be divided into separate and distinct sub-entities that may each own, control and manage separate assets; have separate financial records; and be protected from the financial condition of any of the other sub-entities or series. There is no limit to the number of sub-entities a Delaware series LLC may contain.
Learn more about how to form a Delaware series LLC, including how to start filing the correct Certificate of Formation in order to delineate your LLC's separate sub-entities.
[Please note: As of August 2019, Delaware has amended its Series LLC law. All information in this article pertains to what is now known as a Protected Series LLC, as opposed to the newly introduced Registered Series LLC.]
Download: Series LLC Operating Agreement Template
This class series LLC Operating Agreement elevates the Delaware series LLC to a new level by adding the three-class membership structure, which allows LLC owners to divide members into different classes and assign unequal rights and responsibilities to each group of the series LLC.Start by Forming a Delaware LLC Now
The HBS Blog offers insight on Delaware corporations and LLCs as well as information about entrepreneurship, startups and general business topics.
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