How to Write an LLC Operating Agreement

An LLC operating agreement is a legal document that outlines the operating terms of a limited liability company (LLC) as determined by the business owners. An LLC operating agreement details foundational elements of an LLC that may get disputed, like ownership percentages, capital contributions, voting rights, profit allocation, management, and protocol for dissolution.

LLC members use the operating agreement internally to establish the business structure and bylaws and to settle internal disputes. It is a separate document from the certificate of formation or articles of organization. Filing an LLC operating agreement is not mandatory in all states, but if your business does not have an LLC operating agreement, it will be subject to the standard laws of the state.

The purpose of an operating agreement for LLCs is to make the terms of the LLC official and binding. Drafting a written operating agreement also gives the LLC owners the freedom to customize the way the business runs according to their specific needs.

This is important because the nature of an LLC limits the personal liability of its owners, protecting their personal assets if the business fails or becomes insolvent. The operating agreement allows the business owners to record the parameters of that liability in a detailed manner, providing the business owners with further protection.

A standard LLC operating agreement should include the following pieces of information.

1. 1. Owner information and stakes: An LLC operating agreement will list each partner in the LLC along with their initial capital contributions and their percentage of ownership in the company. It is possible to form both a single-member LLC (one owner) and a multi-member LLC (multiple owners).
2. 2. Statement of intent: An LLC agreement provides a statement of intent, stipulating that it is operating within the legal requirements of the state.
3. 3. Statement of business purpose: The agreement will include a brief statement about the intended purpose of the LLC.
4. 4. Members' rights and duties: An LLC agreement lists each member's duties and responsibilities, as well as their legal rights as related to the business.
5. 5. Voting rights and procedures. The agreement will outline the procedures for the business’ decision-making process via meetings, along with each members' voting rights.
6. 6. Financial allocations: An LLC agreement dictates the terms of how you will allocate business profits and losses to your members.
7. 7. Dissolution terms: The LLC agreement will stipulate how the parties will operate when dissolving the business. This can include provisions for buying out or selling a member's ownership interest in the LLC to new members, or procedures to follow in the event of a member's death.
8. 8. Tax treatment: An LLC operating agreement outlines whether you want your business to be a sole proprietorship, a partnership, or a corporation. This will determine how your business gets taxed.

There are plenty of online templates that can help guide you through the process of writing an LLC operating agreement. However, it’s fairly easy to do it on your own. Here are some tips to remember when drafting your LLC operating agreement.

1. 1. Check your state's rules. Check to see if your state requires an LLC operating agreement and what information you need to include as per state law. There are only five states where LLC operating agreements are mandatory: New York, California, Delaware, Missouri, and Maine. In all other states, the rules for managing the LLC fall to the state's default rules if you don’t have an operating agreement.
2. 2. Define owners and stakes. Establish the owners of your company and clearly state their names in the operating agreement. Include their initial capital contributions and their percentages of ownership in the company.
3. 3. Define operating terms. Draft a section of your LLC agreement that details the member responsibilities and legal rights as related to the business. Discuss how meetings will run, who will be responsible for taking notes, minutes, or weighing in on special projects. Define voting procedures and how many votes each member gets in any big decision-making process.
4. 4. Define financial terms. Detail how you will distribute your business’ losses and profits among owners and members. Define whether your business is a sole proprietorship (owned by one person) or a multi-member partnership (owned by multiple people) which will determine how the business gets taxed.
5. 5. Think about dissolution. Define the procedures for dissolving the business. State how you will distribute business profits or losses in the event of a buyout or bankruptcy. Think about how you want to divide the business up if one or all of the owners die or are incapable of making decisions.
6. 6. File with your state’s secretary of state. Make your LLC operating agreement official by filing it with the local secretary of state. This ensures that the document will always be accessible, and notifies your governing body of how to operate when handling matters related to your business.

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