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The LLC Operating Agreement sets forth the terms governing the limited liability company, its interests, activities, management and provisions governing the rights and obligations of its members. 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 the LLC, who set the LLC's terms and oversee the drafting of the Operating Agreement (among other powers and duties), 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 clearly and explicitly at an early stage protects the interests of everyone involved. Many difficult cases have been decided based on default rules or judicial interpretation of an ambiguous agreement which did not seemingly reflect the wishes and goals of the parties.
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 in order to help ensure the LLC is respected and not disregarded as the member's "alter-ego."
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 also becomes very important if the sole member of an LLC dies.
Download: Single Member LLC Operating Agreement template (.doc file)
Multi-member Operating Agreements are 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, with decisions made by a vote either per person or based on percentage interests.
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. It may provide for any terms not deemed void as illegal or against public policy. 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 one or more third-party managers who are member-selected but not members themselves.
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. Different classes can have preferences over other or different economic, reporting, voting, or other rights.
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.
Download: Three Member Class LLC Operating Agreement Template (.doc file)
Note: This template uses estate planning as the basis for creating the member classes.
Delaware was the first state to adopt the Series LLC form and, recently, the state has adopted new, substantial rules governing this type of entity.
Provisions in Delaware law allow Delaware LLCs to be divided into separate and distinct series that may each
These series are divided into protected series and registered series. The choice between these types of series has significant implications; those interested in the series LLC should review this description and, potentially, consult an attorney.
There is no limit to the number of series a Delaware series LLC may contain.
Learn more about how to form a Delaware series LLC, including the language required in the Certificate of Formation in order to delineate an LLC as a series LLC and to make the required filing to create a registered series.
Download: Series LLC Operating Agreement Template (.doc file)
Harvard can provide assistance throughout the life of your company. These custom services are the most popular with our clients: