Operating Agreement – What Is an LLC Operating Agreement?


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Whenever a new Limited Liability Company is set up, several legal agreements and licenses have to be created. These documents ensure that your LLC has been registered properly under the state government and that the business has met all the legal and judicial terms. An Operating Agreement is one such legal document that LLCs need to have. So here is all about an LLC operating agreement.

LLC operating agreement

What is an LLC Operating Agreement?

An operating agreement is a legal record that has all the details of the LLC and its members. Basically, an operating agreement has information from formation to dissolution. Besides, this document structures the financial functionality of the LLC. Some states may not have the mandatory rule to have an Operating Agreement, but it is necessary to have such a document when you run your business.

Amongst all the documents that have to be drawn out, it is the Operating Agreement, which should be taken care of right after you are done with registering the business name and choosing the registered LLC agent. The Operating Agreements consist of various clauses and other detailed points which will describe the business in-depth. These documents will also explain the relationships between the members and the managers appointed in the business.

How Does an Operating Agreement Work?

As mentioned, an operating agreement is a document that records everything about an LLC from top to toe. This document needs to be filed just after you register your LLC with the state. As the agreement has all the financial and structural functionality of the LLC, it certainly protects the LLC and its members when needed.

As said earlier, some states do not have any legal rules to file the operating agreement. In that case, the LLCs have to follow the rules set by the State. For example, if the State requires equal division of profit among the members, irrespective of the capital share, LLCs have to follow this rule. An Operating Agreement makes things easier, transparent, and clear.

What an Operating Agreement Should Contain

The exact content of the Operating Agreement will be decided by the business members only. However, every agreement should have six different sections, which will indicate all the functional and managerial aspects of the LLC business. For better convenience, you can hire a professional, like NorthWest Registered Agent, that provides a free Operating Agreement template to understand it better.

Rest assured, your company agreement should have the following six departments at any cost.

Article I: Organization

The first article will talk about your LLC business itself. This section will contain all the basic information units which form the overall skeletal of the company. For starters, the date of formation and the founder information should be mentioned in this Article section. Following this, the list of the member names should be there, the percentage of ownership for a multiple-member LLC, and other such details. 

Article II: Management and Voting

In the management and voting section, everything related to the company management and the voting procedures will be discussed. The following points are mentioned clearly in this section:

  • Who is going to manage the business- the LLC can be managed by one or more members or by managers that members appointed. The authority who will be overseeing the company’s affairs will be mentioned clearly to avoid future conflicts of interest.
  • How the voting should be carried out- here, everything related to the voting will be discussed, like the number of votes per member or per unit percentage of ownership and how many votes will be required for bringing the reform into motion within the company.

Article III: Capital Contributions

Every LLC business needs initial capital contributions to the startup. It is in this section that the capital investment details need to be mentioned, starting from the capital amount deposited, the member/members who have contributed to the capital deposit, and others. Apart from this, Article III will also describe how the members are going to make money in the future for company growth.

Article IV: Distributions

For a multi-member company, this article needs to discuss the percentage of ownership that will affect the shares, profits, and asset distribution. This means, that Article IV will describe how much profits each member will get, in what ratio the business assets must be divided, and others.

Article V: Membership Changes

In this section, everything related to the membership will be discussed. Clauses related to the addition, removal, or transference of a member or two have to be mentioned in this section. Apart from this, the terms and requirements for the membership changes will also be mentioned so that no conflict can arise in the future.

Article VI: Dissolution

The last section that will remain the same in all the Operating Agreements is about the dissolution. If the LLC has to be dissolved in the near future, this section will state the circumstances under which the dissolution decision needs to be taken, the pre-requisites for the dissolution, and others. Article VI is actually said to be the “winding up” part of the document, where the end course of the LLC is specified in case the company fails to achieve its goals.

Other Topics Discussed in the Agreement

Apart from the points to be discussed in the six articles of all the Operating Management, some other topics can also be included which will discuss the requirements of the business including the meeting schedules, the annual reports, and so on.

Why Do I Need an Operating Agreement?

Not all states require the business owner to provide the official Operating Agreement. Rather, it is only in the states of Missouri, California, Maine, Delaware, New York, and Nebraska that the LLC needs to provide the agreement at the time of registering the company.

However, there are reasons that back up this mandatory need, which every LLC owner must know.

  • The Operating Agreement covers every detail about how the company is going to work in the future, the interactions between the members and the managers, and other facts.
  • The default rules and other statements are mentioned in the custom Operating Agreement that will be drawn before the registration of the LLC.
  • Every single detail about the capital contribution, the members involved in the contribution, and the management process of the future investments will be mentioned in the agreement.
  • The Operating Agreement outlines the dissolution rules, membership change rules, and other minute details and principles on which the LLC structure is formed.

What to Do After Completing the Operating Agreement?

Once the LLC Operating Agreement is set up, you will have to follow the rest of the processes required for successfully setting up the business and running it in the concerned state. You can hire professional consultants like TailorBrands, who will guide you in the LLC formation process once the agreement is being set up and filed.

Steps to Take After Forming an Operating Agreement

Time needed: 5 minutes.

  1. Get the EIN

    Once the agreement’s filing is successful you must get the EIN number. This unique nine-digit number will allow all the LLC businesses to make proper transactions, hire the employees, and pay the income taxes, and pension taxes, and other functions. The EIN number filing needs to be done with the IRS department of the concerned state.

  2. Open a business bank account.

    Your business will need the bank accounts from where you and other members will be able to make all the transactions, be it transference of money, processing the payrolls of the employees, taking a loan for the business, and so on. You need to submit the Operating Agreement, the name registration certificate, the EIN number, and a nominal fee for opening the business bank accounts.

  3. Register the LLC for state taxes

    After this, you need to register your LLC business with the IRS to understand more about the tax requirements. If your LLC is involved in hiring employees, you need to register for the unemployment pension tax. Meanwhile, if the LLC is dependent on selling services, you need to look further into the sales and income taxes registration process.

  4. Get all the needed licenses and permits.

    You need to get all the licenses and permits related to the LLC business so that you can easily avoid legal and judicial conflicts later on. Also, with the licenses at the right place, you can avoid legal lawsuits filed by someone else.

  5. Have the business insurance ready

    You also need to ensure that the liability insurance papers are ready to be filed by the time you will be done with the previous steps. This type of insurance will prevent your company from falling to the depths of bankruptcy, losses, and others.

How to Write an Operating Agreement

An operating agreement includes all the details of the members of an LLC, their roles and responsibilities, terms of leaving as well as dissolution of the business.

A comprehensive operating agreement is an important document for the future success of your business. It contains crucial information about your business dealings and is vital in case of legal disputes. An operating agreement is often crafted by business attorneys, but you can also create a solid agreement yourself. In either case, you must be as thorough as possible and ensure that your documents are accurate.

Before writing your operating agreement, you must first form your LLC. If you haven’t done this yet, it’s not a problem. You can find a free operating agreement template PDF in your state. The operating agreement should contain six articles, including membership, management, voting, and capital contributions.

The operating agreement should specify who has the authority to make decisions for the company. If a member wants to add another member to the business, he or she must have approval from all the other members. In addition, new members may be required to contribute capital. An operating agreement should also define the amount of money a member is allowed to draw out at will.

The operating agreement should also state the procedure for dissolution. It should also state how the business should be divided in the event of bankruptcy or buyout. Additionally, it should state how the business should be divided if one or more partners die. In addition, the operating agreement should be filed with the state secretary of state. This will ensure that the document is easily accessible to future owners and notifies the state’s governing body of its operations.

Before creating your operating agreement, you should decide what elements you need to include. A good operating agreement includes basic information about your business, including the legal names of all members and the principal business address. It also specifies the name and address of the registered agent. For example, Mary puts up 50% of the startup capital and Larry puts up 25%. If the LLC dissolves, the state might divide the assets equally.

An operating agreement is essential if you want to set up a limited liability company. A business attorney can help you craft a sound operating agreement. An attorney can also help you file your operating agreement with the state. For more assistance, you can also use an online legal service to create a customized operating agreement for your LLC. A good online service will guide you through the entire process and ensure it meets the requirements of your state.

The main objective of an operating agreement is to protect the limited liability status of the business. It also protects members from personal liability. Without an operating agreement, LLCs could end up resembling a partnership or sole proprietorship. Therefore, it is vital to establish a written agreement.

F.A.Qs

How much does an operating agreement cost?

The cost of the Operating Agreement will depend on the state from where you will be filing the document. But, you can get an approximated amount by using the operating agreement tool.

What is the difference between the Operating agreement and the bylaws?

Bylaw and Operating Agreement are the same since both of these documents describe everything about the internal operations. But, the Bylaws are drafted for a corporation, whereas the Operating Agreement describes the LLC.

What will happen if the LLC doesn’t have an Operating Agreement?

Without the agreement, the LLC company will be creating roadblocks between the management, ownership, and accounting pillars. Not all the members will agree at one point without the agreement. Also, you wouldn’t be able to file for the EIN, and hence, your corporate veil will dwindle.

In Conclusion

An operating Agreement is needed while forming an LLC but it is not mandatory in all states. However, it is recommended to have an operating agreement when you start your LLC. Because operating agreements are the documents that record every detail of your business. You can get the operating agreement drafts from the LLC formation services at a reasonable price.

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