- What is an Operating Agreement
- Types of Operating Agreements
- How to Start an LLC
- How to Write an Operating Agreement
- What to Include in an Operating Agreement
- Operating Agreement Sample
- Frequently Asked Questions (FAQs) About Operating Agreements
LLC Operating Agreement
What is an Operating Agreement
An operating agreement for an LLC sets out a number of important rules for the running of a limited liability company. These cover numerous features of the business such as:
Member investments, and duties
How the business will be taxed
How profits will be distributed
It is an essential legal document that should be completed whether it is a single-member or multi-member limited liability company. It is an essential requirement in the following states:
Even if it’s not a requirement of your state, having an operating agreement for an LLC can help answer questions about how a company is run. It does this by creating a detailed record of the business’s precise ownership, management structure and the capital contribution of members.
Types of Operating Agreements
There are 2 types of operating agreements:
Single-member agreements are used by single-owner LLCs, while multi-member agreements are created by LLCs owned by multiple people. If it sounds simple, that's because it is.
While the details of these agreements may vary depending on the specific needs of your LLC, they will typically cover sections dealing with organization—such as members' names and addresses, capital contributions, distributions and distributions, profits and losses, management, voting rights, and dissolution.
Both types of operating agreements must be signed by all members involved in the LLC
How to Start an LLC
Starting an LLC is not a complicated process. It is a relatively simple form of business that offers more protection than a sole-owner or partnership company, and less complication and fewer formal annual duties than a corporation.
To start an LLC you’ll need to follow these steps:
Decide which state’s laws will apply: Each state has its own individual rules for setting up LLCs. This will normally be the state the business is being run from and will dictate the exact process of registering the company.
Choose the name of your business: If you are already trading as a partnership or sole-proprietor company, you’ll probably already have a name you can use. If not, you must decide on a name that you can have for the business. It should be easy to remember and must not already be registered by another company or trademarked.
Decide on the registering agent: You, another member of the business, or a third party (as required in some states) must be chosen to act on behalf of the LLC. They will be responsible for all official state communications and responding to any important notices, such as lawsuits. This will need to be recorded in the articles of organization you submit to your state and in your operating agreement documentation.
File the LLC Papers of organization: In this final step, you need to formally inform your state government that you are registering your LLC. This involves paying the application fees (around $80-$500 depending on the state you’re in) and submitting the articles of organization.
At this point, the operating agreement can be drafted and published. Normally your LLC has to be declared “active” in order for your completed operating agreement to be valid.
How to Write an Operating Agreement
Whilst it may seem a complicated legal document, writing an operating agreement does not need to be a difficult process. Using an online operating agreement template, for example, can speed up the process dramatically.
When you write your own document, remember that it should be written in plain English so it is easy for anyone to interpret. This will be important when sharing this information with fellow members of the business.
In addition to the information you must detail about ownership percentages and investment capital, you should also include a number of statements.
The first of these is a statement of intent, which indicates the LLC is being set up following the laws of your state and that these will apply once the articles of organization have been registered.
Secondly, you should include a business purpose statement. This outlines the nature of the company’s operations to make clear what the LLC will do.
Unlike the articles of organization, your operating agreement doesn’t need to be submitted to a government office. Instead, it should be held by the registering agent and any other members of the business.
Once the document is completed and signed, a copy should be distributed to each member of the company. It should be stored in a safe place until it is needed or has to be amended in the future.
What to Include in an Operating Agreement
There are a number of important considerations that company owners will need to feature in their LLC operating agreement. A completed document will normally include details of the following:
How ownership is divided among the members of your business
The distribution of membership duties and responsibilities
How profits will be allocated
How a member can officially leave the business
How the business can be closed down if necessary
What form of taxation framework the business will be assessed under
However, at minimum your completed operating agreement needs to contain these key details:
The names and signatures of all members of the LLC
The capital contribution and interest percentages of each member
The date of the annual meetings of the new LLC
Operating Agreement Sample
If you’re new to managing an LLC, it can help to see a real example of an operating agreement before getting started on creating your own. View our sample operating agreement below to get a good idea of what your document should look like when completed.
Frequently Asked Questions (FAQs) About Operating Agreements
If you’re still wondering about some features that are in an operating agreement, don’t panic. Find out even more about this kind of business legal document with our answers to some of the most frequently asked questions below.
Do I Need an Operating Agreement to Form an LLC?
In some states, it is a necessary process to create an operating agreement, even in the case of single-member LLCs. It must be created once the articles of organization have been submitted and the company is deemed active by the state.
Creating an operating agreement is not always an obligatory step to the creation of a single-member LLC however. It is usually a requirement in the case of multiple-member organizations. Nevertheless, it’s highly recommended in all cases.
How Much Does an LLC Cost Per Year?
In addition to the filing fees paid initially during the company registration, LLCs also have to pay annual or biannual fees to keep their status. In most states, this simply consists of the costs of submitting an annual or biannual report.
However, in some states, it is necessary to also pay Franchise Tax on an LLC. In most situations, this is a flat tax although some states levy is based on annual earnings.
How Can I Change an Operating Agreement of an LLC?
It is possible to change an operating agreement if circumstances shift in the business. For example, if it is necessary to add or remove members of the LLC from the documents.
When this is necessary, the process is quite simple. Any changes that need to be made must first be approved by all members of the business. Once ratified, it’s just a question of amending your operating agreement document. The new copy should be distributed to all members and stored safely.