A Limited Liability Company (LLC) Operating Agreement is a legal document that provides bylaws that outlines the company’s daily internal operations, management, ownership, and staff duties. More often, LCC can be managed either by a member (or group of members), or a designated manager(s). While it is not a basic requirement for most states, it may be required by financial institutions, such as when opening bank accounts. Also, you may be requested to provide the LLC Operating Agreement by IRS to determine how decisions are made or to establish ownership details.
If you want to take more control over your day to day operations of your company, then you need to consider having an LLC Operating Agreement written down. Since the LLC provides an agreement for the company’s operations, it helps reduce discrepancies that would otherwise erupt in its absence. Besides, it helps you specify rules which you would want to follow for the effective operation of the company.
If the LLC agreement isn’t put in writing, the company may find it difficult to get legal help when confronted with taxation or legal issues of any sort. At the same time, the company will find it difficult to open a business checking accounts with the bank, secure financing, or even receive investment money as it’s one of the key requirements.
While there is no specific time to create this agreement, it’s advised that you have it created at the beginning of your company’s operation to help guide business decisions. Some of the states where the LLC Operating Agreement is mandatory are Delaware, Maine, Missouri, New York, and California.
Depending on the state you are in, an LLC Operating Agreement may also be referred to as Professional Limited Liability Company (PLLC), Operating Agreement, LLC Agreement, or LLC Partnership Agreement.
LLC Operating Agreement by Types:
LLC Operating Agreement by types exist in two forms as described below:
- Single-member operating agreement: This agreement is often used by LLC under single ownership.
- Multi-member Operating Agreement: These agreements are used with LLC with more than one owner.
LLC Agreement Forms (by State)
If you are looking for how to properly monitor your company’s day-to-day operations, then you should invest in creating an LLC Operating Agreement. Unfortunately, many people find the process of creating the LLC Operating Agreement time-consuming and effort draining. However, this shouldn’t worry you. Simply download our free LLC Operating Agreement templates and get started.
How to Write an LLC Agreement (What is Included)
The basic considerations of LLC Agreements include:
This is the introductory part of the agreement. Usually, a preamble contains the dates on which the agreement was formed. Also, it gives a brief definition of the agreement to make the reader aware of what the document is all about.
Just like the preamble, recitals are also part of the introductory statement. However, recitals do consist of basic information about the company. These details may include why the LLC was formed, the reason for its formation.
Binding authority is where one party gives full authority to another to transact on their behalf in accordance with the terms and agreement signed.
This is where all the duties and responsibilities of each member of the company are entered.
This will describe how people will assemble to engage in formal discussions about the company. It also describes the frequency of each meeting that should be held and at what intervals.
The members are the particulars of every individual that owns the company. Also, this section explains how new members can join as well as how old ones can leave.
Some of the key information each member should provide include:
- Name and address
- Membership class
- Contribution on capital
- Ownership percentage
- Share of profits and losses
Registered agents are individuals or parties who are allowed to accept or process legal documents on behalf of a company or business.
This part describes individual(s) with exclusive rights or control over a business or company. The ownership can be the percentage of ownership each member has.
This refers to the duration in which the agreement will take before members decide to dissolve or continue with the engagement.
Transferring interest simply means a percentage of a member’s ownership that he or she is willing to trade.
Company formation-related components of the agreement will revolve around the company’s formation and dissolution details.
Typically, these will include the following;
Operating agreement amendment
The section on operating agreement amendment describes whether any alterations made to the operating agreement should be done in writing for it to be valid.
The dissolution section gives an in-depth detail of when and how the company will get dissolved. Also it addresses how individual member will receive their share of company ownership or contributions.
The components of the agreement that will fall under the category of capital contributions will revolve around the guidelines on how capital and all the sub-sectors related to it are established.
Typically, these will include the following;
Contribution simply refers to the amount of money, assets or services every individual owner brings at the beginning of the agreement, or can be requested to give in the future.
Profits and losses
This is where the members/owners discuss how profits and losses will be distributed amongst them. Usually, the mode of distribution can be in the form of percentage ownership, tax brackets, or financial needs.
Duty to loyalty
This describes the member’s trust to act solely on the company’s interest or that of beneficiaries. This also describes whether the members can share the business opportunity with the company at their will.
Here, the company agrees to compensate or defend members against any harm or legal claim. However, if the member is a victim of their misconduct or negligence, such compensation won’t be granted.
Often times, members aren’t subjected to any liability of the company. However, if any of them engages in an intentional wrongdoing, then they may be held liable according to the agreement.
Under life insurance, the company may promise to compensate its members and relevant parties for minimizing capital gain taxes that may accrue at the time of the individual’s death or when they are selling their interest.
Here, the members/owners can decide on the management method of their business or company. For instance, they can decide to manage the business by themselves or hire a professional manager.
Members can agree not to violate their membership privileges or terms. For instance, they may prohibit delegating their authority to non-members.
The components that fall under the compensation category of the agreement will typically include the following;
If the members decide to hire a manager, then they should agree on how much to compensate for the services.
In the reimbursement section of the agreement, the members can agree whether to compensate the managers out of their pockets or to use company assets in doing so.
The bookkeeping section of the structure will include any components that pertain to the company accounts’/funds bookkeeping.
These will typically include;
Accounting is an important aspect for every company. Therefore, members can decide to use Generally Accepted Accounting Principles (GAAP) to ensure their accounts are clear, accurate, and updated.
In order to fast-track the company’s progress, an annual report will come handy. This will show the company’s annual financial progression.
Auditing is another integral part of financial management. Members can agree to examine their accounts by conducting regular audits.
In order to get reliable information for future decision-making, there should be proper records. That’s said, accurate records will be maintained, and a copy is presented upon request.
Here, members will see to it that the LLC is in full compliance with the federal and state income taxes.
Typically, this section will include the following;
Tax matters partner
Depending on the agreement, one member (known as tax partner) can represent the LLC before the IRS when addressing tax issues.
If the value of the LLC is needed, the members can decide to involve a private entity to carry out the valuation process. The valuation basically will give out the company’s market value at that particular moment.
Any components that fall under the category of transfers, in the agreement relate to how transfers are to be made in fiscal terms.
These will typically include the following;
The members will state out whether they are allowed to buy other members’ interests at will for whichever reason.
Voting is an important right that needs to be fulfilled by every member. It’s, however, important to note that this right is only limited to members. Therefore, this section will highlight each members voting power and other regulations attached to it.
Any other essential considerations that must be part of the agreement, based on their nature and its relevance to your organization can and should also be added in the form.
These considerations could include;
What happens if a member quits, is found incompetent, or dies
If a member dies or is found incompetent, then the members can decide to remain active, terminate the company, or add another eligible member. This decision should be made through a vote after 60 days of the incident.
How and when the LLC may be dissolved
Winding up an LLC basically refers to resolving and settling all the company’s liabilities and obligations. In other words, when the business decides to dissolve for whichever reason, the members will decide to wind up the LLC by selling the assets to settle its dues. This helps ensure that all the parties involved are contented and satisfied. Here, members can reach an agreement on situations or factors that may lead to the company’s dissolution. Also, measures on how the assets will be sold out after dissolution are stated. Apart from that, the date and time when the LLC may be dissolved are also specified in this sub-section.
Financial and administrative aspects
Here, members will specify how the company will be managed. This extends to the financial and administrative aspects such as fiscal year reports, yearly report details, and accounting methods. This section will also describe whether the company will be taxed as disregarded entity or a corporation.
When categorized as a disregarded entity, the Internal Revenue Service (IRS) will treat the company as a single member LLC, which resembles a sole proprietorship. Otherwise, if it’s categorized under a corporation then the LLC will be taxed under the company level. This means that every member will have to pay for income tax on any stated contributions.
As a bonus tip, if your LLC has at least two members, then it will be treated as a partnership for taxation purposes. However, it can also decide to be taxed as a corporation if need arises.
LLC Operating Agreement State Laws
As mentioned earlier, LLC Operating Agreement does differ from state to state. Depending on the state where you come from or operate, you can always check the requirements just to be sure. States such as Delaware, Wyoming, and Nevada generally have favorable tax regulations as well as business infrastructures. Therefore, members of an LLC can simply operate privately from the public with a single registered agent’s name being made for public records.
If you intend to operate a local business, then you can register it within your state. However, you intend to have a business operating outside the state in which you live; you will have to look for a registered agent that lives in the outside state(s).
|AL – § 10A-5A-1.08||AK – AS 10.50.095||AZ – § 29-3105||AR – § 4-32-405||CA – Corp Code 17701.10|
|CO – § 7-80-108||CT – § 34-243d||DE – § 18-101 to § 18-1109|
FL – § 605.0105
GA – Title 14, Chapter 11
|HI – § 428-103||ID – § 30-25-105||IL – 805 ILCS 180||IN – IC 23-18-4-4||IA – § 489.110|
|KS – § 76-7672||KY – § 275-180||LA – RS 12:1319||ME – § 31-1521||MD – § 4A–402|
|MA – Chapter 156C||MI – § 450.4308||MN – § 322C.0110||MS – § 79-29-123||MO – § 347.081|
|MT – § 35-8-109||NE – § 21-110||NV – NRS 86.286||NH – § 304-C:41||NJ – § 42-2C-11|
|NM – § 53-19-19||NY – § 417||NC – § 57D-2-30||ND – § 10-32.1-13||OH – § 1705.081|
|OK – § 18-2012.2||OR – § 63.057||PA – § 8916||RI – § 7-16-22||SC – § 33-44-103|
|SD – § 47-34A-103||TN – § 48-206-101||TX – Sec. 101.052||UT – § 48-3a-112||VT – 11 V.S.A. § 4003|
|VA – § 13.1-1023||WA – RCW 25.15.018||WV – § 31B-1-103||WI – Chapter 183||WY – § 17-29-110|
Can members amend (change) terms in the LLC Operating Agreement?
LLC members can change the terms in the LLC Operating Agreement. However, this can only be done through majority votes.
What is the difference between a partnership and an LLC?
In partnership, every partner is often liable for obligations and debts. However, in LLC, members combine both the limited liability with the tax advantages associated with the general partnership.
Does an LLC have shares of stock like a corporation?
No. an LLC doesn’t have shares of stock as a corporation does. With LLC, individual members are assigned a percentage of ownership according to their respective contributions to the capital share.
Who is considered a member of an LLC?
An LLC member is a person or party that has ownership shares with the Limited Liability Company (LLC). Before you qualify to be an LLC member, you must have provided capital contributions such as money, property, or services, to mention a few.