What should I include in an LLC operating agreement?

Understanding the Importance of an LLC Operating Agreement

Starting a Limited Liability Company (LLC) is an exciting step toward building your business. But have you thought about what happens if disputes arise, ownership changes, or major decisions need to be made? That’s where an LLC operating agreement comes in.

An operating agreement is a foundational document that outlines how your LLC will be run. While not always legally required, it’s a crucial contract that protects your business and ensures smooth operations. Without one, state default laws govern your LLC, which may not align with your vision.

So, what should you include in an LLC operating agreement? Let’s dive in.

Key Elements of an LLC Operating Agreement

1. Basic Business Information

Every operating agreement should start with essential details about the LLC, including:

• Business Name: Ensure it matches the official name registered with the state.
• Principal Address: The LLC’s official location for correspondence.
• Registered Agent: The individual or entity designated to receive legal documents.
• Formation Date: When the LLC was officially created.
• State of Formation: The state where the LLC is registered.

2. Ownership Structure

Clearly define ownership details, including:

• Members’ Names and Contributions: List all LLC members and their ownership percentages.
• Initial Capital Contributions: How much each member has invested in the business.
• Future Contributions: Rules on additional investments or capital calls.

3. Management Structure and Decision-Making

LLCs can be managed in two ways:

• Member-Managed: All owners participate in daily operations.
• Manager-Managed: A designated manager (who may or may not be a member) oversees business decisions.

Specify who makes decisions and how they will be voted on:

• Majority vs. Unanimous Votes: What decisions require a simple majority and which need full consensus?
• Meeting Requirements: How often members must meet and how votes are conducted.
• Authority of Managers: If applicable, define the manager’s powers and responsibilities.

4. Profit and Loss Distribution

One of the biggest advantages of an LLC is flexible profit distribution. In your agreement, detail:

• How Profits and Losses Are Shared: Based on ownership percentage or another agreed method.
• When Distributions Are Made: Monthly, quarterly, or annually.
• Tax Allocations: How taxes on profits and losses will be handled.

5. Member Roles and Responsibilities

Clearly outlining responsibilities prevents conflicts and confusion. Consider defining:

• Each Member’s Duties: Who handles finances, operations, marketing, etc.?
• Time Commitment Expectations: Especially important for multi-member LLCs.
• Compensation (if any): Whether members receive salaries or only profit distributions.

6. Membership Changes and Buyout Clauses

Your operating agreement should establish rules for:

• Adding New Members: The process and approval requirements.
• Member Exit or Retirement: Whether an exiting member can sell their share and to whom.
• Buyout Terms: If a member leaves, how their ownership stake will be valued and paid out.
• Death or Incapacity of a Member: Who inherits the shares, and how transitions are managed.

7. Dissolution and Closing the Business

No one starts a business expecting to shut it down, but it’s wise to plan for worst-case scenarios. Include:

• Grounds for Dissolution: Unanimous vote, bankruptcy, or other predefined triggers.
• Asset Distribution: How remaining assets will be divided.
• Notification Procedures: Steps for legally dissolving the LLC.

8. Dispute Resolution

Conflict is inevitable, so plan ahead for resolving disputes. Options include:

• Mediation or Arbitration: Before resorting to lawsuits, members agree to mediation or arbitration.
• Voting Requirements for Dispute Decisions: Majority vs. unanimous decision-making.

9. Amendment Process

Business needs change, and so should your operating agreement. Establish a clear process for making amendments, including:

• Who Can Propose Changes?
• How Amendments Are Approved?
• Record-Keeping for Updates.

FAQs About LLC Operating Agreements

1. Is an LLC operating agreement legally required?

Not always. Some states, like California and New York, require one, but even in states where it’s optional, having one is highly recommended to prevent legal and operational issues.

2. Can I write an LLC operating agreement myself?

Yes, you can draft one using templates from legal websites like LegalZoom or Nolo. However, consulting an attorney ensures compliance with state laws.

3. What happens if I don’t have an LLC operating agreement?

Without an agreement, state default laws dictate how your LLC is run, which may not align with your preferences. This can lead to disputes and complications in decision-making, profit distribution, and membership changes.

4. Can an operating agreement be changed?

Yes! Your LLC operating agreement should include an amendment process, ensuring that any necessary changes can be made as your business evolves.

5. How often should I review my operating agreement?

It’s a good practice to review it annually or whenever significant changes occur, such as new members joining or shifts in management structure.

Final Thoughts: Protect Your LLC with a Strong Operating Agreement

An LLC operating agreement isn’t just a formality—it’s a blueprint for success. It protects members, provides clarity on business operations, and helps prevent disputes. Whether you’re forming a new LLC or refining an existing one, taking the time to draft a comprehensive agreement will save headaches down the road.

Need Help Creating Your LLC Operating Agreement?

Consult an attorney or use online legal services like Rocket Lawyer to ensure your agreement meets your needs.