Creating a limited liability company (LLC) operating agreement is a necessary but challenging task for new companies. These documents can help you define the key operations needed to run a new LLC smoothly and avoid disagreements among members.
In this article, we’ll examine what goes into a good LLC operating agreement and how you can create your own operating agreement. We’ve also provided a sample LLC operating agreement template and single-member LLC operating agreement example to inspire you.
Just remember that your individual LLC operating agreement will be unique. A single-member LLC operating agreement will look different from a multi-member LLC operating agreement and the main goal is to make sure your document meets your needs. Don’t be afraid to make changes or additions as you see fit. It’s also a good idea to run all legal contracts by a law firm.
On This Page:
- What Is an LLC Operating Agreement?
- How to Create an LLC Operating Agreement Step-By-Step
- Free LLC Operating Agreement Template
- Sample Single-Member LLC Operating Agreement
What Is an LLC Operating Agreement?
Purpose of the LLC Operating Agreement
An LLC operating agreement is a binding contract that establishes the member’s rights, roles, and responsibilities within the company. It is an internal document that sets forth how the company will be managed, how profits and losses will be shared, and what happens if a member leaves the LLC. The operating agreement should be created before the LLC is formed, as it can help prevent disagreements among members down the road. Even if you are the only member of an LLC, having an operating agreement can help you avoid legal issues in the future.
Do I Need an Operating Agreement for My LLC?
In some states, LLCs are required to have an operating agreement. Even if your state does not require one, it is still a good idea to create an operating agreement, as it can help prevent disputes among members and clarify each member’s rights and responsibilities.
How To Create an LLC Operating Agreement Step-By-Step
What Should Be Included in an LLC Operating Agreement?
An LLC operating agreement should be unique and meet the needs of your specific business. However, there are some key provisions that should be included in most any LLC operating agreement:
- The names and addresses of the LLC’s members
- The LLC’s purpose
- How the LLC will be managed (by all members or by a manager)
- How profits and losses will be shared
- What happens if a member leaves the LLC
- The effective date of the operating agreement
You may also want to include other provisions, such as how new members can join the LLC, what happens if the LLC is dissolved, and what happens if a member dies. Some of these elements are generally only needed for LLCs with multiple members and are not necessary for a single-member LLC operating agreement.
Key Components of LLC Operating Agreements
Your LLC’s operating agreement should be customized to fit the needs of your specific business and structure, but there are some basic elements that can help you establish the foundation of your operating agreement regardless of your business. Be sure to consult with an attorney who can provide legal advice for your individual needs.
- LLC Name – The first step in creating your operating agreement is to name your LLC. You’ll want to choose a name that is distinguishable from other businesses and easy to remember. Be sure to check with your Secretary of State’s office to make sure your business name is not already in use.
- LLC Type – The operating agreement should identify whether the LLC is single-member or multi-member.
- Member Information – Make sure to include the names and addresses of all LLC members.
- State of Jurisdiction – Identify the state in which your LLC is registered to do business.
- Principal Place of Business – State the LLC’s primary place of business. This address will be where the LLC conducts most of its business.
- Registered Office and Agent – Name the LLC’s registered office and agent. This means whoever is appointed to receive legal documents on behalf of the LLC. Often, the registered agent is an attorney.
- LLC Purpose – This is where you define the LLC’s purpose. It can be as simple as “The LLC is formed for the purpose of engaging in any lawful business activity.”
- Management – Specify how the LLC will be managed. There are two options for this: either all members will manage the LLC (known as member-managed) or a manager will be appointed to manage the LLC (known as manager-managed). If you choose to have a manager-managed LLC, the operating agreement should also specify how the manager will be chosen and what powers the manager will have.
- Assignment of Interests – Make it clear that no member may assign or transfer their interest in the LLC to a party that is not approved by the other members and may not withdraw from the LLC without a unanimous vote if there are multiple members.
- Right of Refusal – Your operating agreement should say what happens if a member wants to sell their interest in the LLC. This is known as the right of first refusal and can help prevent the LLC from being taken over by someone who is not a member. This section is only necessary for multi-member LLCs.
- Ownership of Business Property – Identify who owns the LLC’s business property. This includes things like office furniture, equipment, and inventory. For a single-member LLC, this section can state that all business property is owned by the LLC and not the owner.
- Meetings – The agreement should state how LLC meetings will be conducted and how decisions will be made. This can help prevent disagreements and help the LLC run more efficiently.
- Voting – Detail how voting will be conducted in multi-member LLCs. This includes things like how many votes are needed to pass a resolution and what to do in case of a tie.
- New Members – Outline the process by which new members may enter into a multi-member LLC.
- Member’s Capital Contributions – Identify how much each member has contributed to the LLC and whether those contributions are in cash, property, or services. The operating agreement should also specify the roles and responsibilities of each member. This can help prevent misunderstandings and disagreements down the road.
- Profits and Losses – Explain how profits and losses will be shared among all the members. This can be done in a variety of ways, such as equally, based on each member’s percentage of ownership, or based on each member’s investment in the LLC.
- Withdrawals – Address what will happen if a member leaves the LLC voluntarily or involuntarily (such as through death or bankruptcy). This can include specifying how the member’s interest in the LLC will be transferred and how the LLC will be dissolved. This section is only needed for LLCs with more than one member.
Free LLC Operating Agreement Template
- Company Basics
- LLC name
- Company formation date
- State of formation
- Place of business
- Single-member or multi-member LLC
- Registered agent
- Member name(s)
- Member address(es)
- Company Management
- Purpose of business
- Assignment of interests
- Right of refusal
- New member procedures
- Ownership of company property
- Amount(s) each member contributed to the LLC
- Profits & Losses
- Amount each member receives
- Governing law
Sample Single-Member LLC Operating Agreement
A. The Member desires to form a single-member limited liability company pursuant to the provisions of the __________________ Limited Liability Company Act (the “Act”), and desires to set forth the terms and conditions of the management and operation of the single-member limited liability company known as __________________ (the “Company”).
B. In consideration of the foregoing premises and the mutual agreements, benefits, rights, and obligations herein contained, the parties hereby agree as follows:
ARTICLE 1 – FORMATION OF COMPANY
1.1 Formation. The Member hereby forms a single-member limited liability company pursuant to the provisions of the Act and the laws of the State of ____________________, with its principal place of business located at __________________ (the “Principal Office”). The Company shall commence business upon execution of this Agreement by the Member. The Company was formed on __________________, 20_____.
1.2 Registered Agent. The Member hereby appoints __________________ of __________________ (Address) as the Company’s initial registered agent for service of process in the State of __________________.
ARTICLE 2 – PURPOSE AND POWERS OF THE COMPANY
2.1 Purpose. The Company is organized for the purpose of engaging in any lawful act or activity for which limited liability companies may be organized under the Act. Without limiting the generality of the foregoing, the Company shall have the power to conduct its business, carry on its operations, and exercise all such other powers as are permitted by law.
2.2 Powers. The Company shall have all of the powers and authority of a natural person, including the power to do all things necessary or convenient to carry out its business and affairs in accordance with this Agreement and applicable law. Notwithstanding the foregoing, the Company shall not have the power or authority to take any action that would make it liable for federal income taxes as an association taxable as a corporation under Subchapter C of the Internal Revenue Code of 1986, as amended (or corresponding provisions of any future United States Internal Revenue Law) (the “Code”).
ARTICLE 3 – MANAGEMENT OF COMPANY
3.1 Management. The business and affairs of the Company shall be managed by its sole Member. The Member shall have complete discretion in making all decisions with respect to the business and affairs of the Company, including, without limitation, decisions regarding the nature and scope of the business to be conducted by the Company, the hiring of employees, contractors, and agents, the entering into of contracts and other agreements on behalf of the Company, and all other matters relating to the management of the business and affairs of the Company.
3.2 Ownership of Company Property. All company assets shall be deemed owned by the Company and the Member will have no ownership interest in such assets.
ARTICLE 4 – CAPITAL CONTRIBUTIONS
4.1 Initial Capital Contribution. The Member has contributed the sum of __________________ dollars ($__________________) (the “Initial Capital Contribution”) to the Company as its initial capital contribution, which amount shall be increased or decreased from time to time as set forth in Section 4.2 below. The Member’s initial capital contribution shall be used solely for the lawful purposes of the Company. All capital contributions made by a member to the Company are hereby assigned to and accepted by the Company and shall be its property free and clear of all liens, charges, and encumbrances whatsoever.
4.2 Additional Capital Contributions. The Member may from time to time, but is not required to, make additional capital contributions to the Company in cash or property (the “Additional Capital Contributions”). Any Additional Capital Contributions made by the Member shall be used solely for the lawful purposes of the Company. All capital contributions made by a member to the Company are hereby assigned to and accepted by the Company and shall be its property free and clear of all liens, charges, and encumbrances whatsoever.
ARTICLE 5 – PROFITS & LOSSES
5.1 Distributions. The Member shall be entitled to receive all of the profits and losses of the Company, whether or not such profits and losses are distributed in cash.
ARTICLE 6 – MISCELLANEOUS
6.4 Waiver of Breach. The waiver by any party hereto of any term, provision or condition of this Agreement, or the failure by any party at any time to assert its right with respect to any term, provision, or condition of this Agreement, shall not be construed as a subsequent waiver of such term, provision or condition or as a waiver of any subsequent breach thereof.
6.5 Severability. If any term, provision, or condition of this Agreement is determined by a court of competent jurisdiction to be invalid or unenforceable in whole or in part, then such term, provision or condition shall be construed in a manner consistent with applicable law to reflect as nearly as possible the original intentions of the parties hereto, and the remainder of this Agreement shall remain in full force and effect.
6.6 Governing Law. This Agreement and all matters arising out of or relating to this Agreement shall be governed by the internal laws of the State of __________________, without giving effect to any choice-of-law provision thereof.
6.7 Indemnification. The Company shall indemnify and hold harmless the Member, to the fullest extent permitted by law, from and against any and all claims, damages, losses, liabilities, costs, and expenses (including reasonable attorneys’ fees) incurred by the Member in connection with or arising out of any action, suit or proceeding to which the Member may be made a party by reason of the fact that it is or was a Member, or an officer, director, employee or agent of the Company (or is serving at the request of the Company as a director, officer, employee or agent of another corporation), whether or not such action, suit or proceeding is instituted by the Company. Notwithstanding the foregoing sentence, no indemnification shall be provided in respect of any claim, issue, or matter as to which such Member shall have been finally adjudged to be liable for gross negligence or willful misconduct in the performance of its duties as a Member, or an officer, director, employee or agent of the Company. The right to indemnification conferred in this Section 6.7 shall include the right to be indemnified against all expenses (including attorneys’ fees) reasonably incurred by such Member in connection with defending any such action, suit, or proceeding, whether or not theretofore brought, finally adjudicated or resolved and whether on appeal. Such right of indemnification shall continue as to a person who has ceased to be a Member and shall inure to the benefit of the heirs, executors, and administrators of such person. The foregoing right of indemnification is a contract right and may not be abrogated by any amendment to this Agreement subsequent to the date hereof without the written consent of each then-current Member.
IN WITNESS WHEREOF, the parties hereto have executed this Operating Agreement as of the date first written above.
What Is an LLC Operating Agreement?
An LLC operating agreement is a contract between the members of an LLC that sets forth the rights and responsibilities of the members with respect to the LLC. The operating agreement should include provisions on such things as how the LLC will be managed, how decisions will be made, what happens if a member leaves the LLC, how profits and losses will be distributed, and all other business affairs.
What Should Be Included in an LLC Operating Agreement?
An LLC operating agreement should, at a minimum, set forth the following: (1) the name of the LLC; (2) the names and addresses of the members; (3) how the LLC will be managed; (4) how decisions will be made; (5) what happens if a member leaves the LLC; and (6) how profits and losses will be distributed.
How Do I Create an LLC Operating Agreement?
There is no one-size-fits-all answer to this question, as the contents of an LLC operating agreement will vary depending on the particular LLC's business and structure. However, there are some general steps that can be followed in creating an LLC operating agreement, which includes:
- Deciding on the basic structure of the LLC
- Drafting the operating agreement
- Having all members sign the agreement.
Remember that an operating agreement is a legal document. If you have questions as you draft your document, you might want to seek out a law firm that can provide legal advice. Likewise, an accounting firm can help answer your business-related finance questions. Having resources to provide legal or tax advice is a good idea for any LLC.
Do I Need an LLC Operating Agreement?
While an LLC operating agreement is not required by law in every state, it is generally a good idea to have one in place. This is because the operating agreement can help to avoid disputes between the members of the LLC and set forth everyone's rights and responsibilities in a clear and concise manner.
Can I Change My LLC Operating Agreement?
Yes, you can change your LLC operating agreement, but you will need the consent of all of the members of the LLC to do so if you are part of a multi-member LLC. If you want to make changes to the agreement, it is best to consult with an experienced attorney to ensure that the changes are made properly and in compliance with applicable laws.
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