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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.
An Operating Agreement is not required in a single-member LLC, but most attorneys recommend you have one that is signed and dated by the primary member (owner), just as a formality.
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.
In your LLC Operating Agreement, you may, but are not required to, include language that excludes others from ever becoming members. If the LLC Operating Agreement mentions nothing about the number of members, then the law assumes there is at least one member and you are free to add as many other members as the LLC desires, as there is no limit on the number of members you may have in a Delaware LLC.
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.
For example, some situations might call for one member to have ultimate authority over bank accounts, or the ultimate power to bind the company by contracting with others.
The Operating Agreement may also provide for the establishment of committees or groups of members with specific rights or management responsibilities.
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.
One of the most sophisticated structures for an LLC is the multi-class structure.
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. The specific provisions that outline limits on power, responsibility and governance, and all other pertinent LLC details, can be devised by the founder(s) of the LLC according to the Delaware LLC freedom of contract precept.
In order to take advantage of this feature of the Delaware LLC, you must specify in the LLC Operating Agreement each class you wish to remain separate, and delineate each class' individual rights and privileges, including any denied rights and privileges.
You may have one or more classes of membership; there are no limits on the number of classes.
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 series LLCs are used to manage multiple properties or assets under one LLC, and a series LLC separates each property as though each asset were a separate entity.
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: