An LLC operating agreement is a document between the members of a company that records an entity’s ownership, officers, and any other terms its members agree upon. It must be signed by all members and executed when forming a company.
Is an Operating Agreement Required?
An operating agreement is required in the states of California, Delaware, Maine, Missouri, and New York.
By Type (2)
Single-Member LLC Operating Agreement – For a company with one (1) owner.
Multi-Member LLC Operating Agreement – For a company with two (2) or more owners.
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Rhode Island
- South Carolina
- South Dakota
- Washington D.C.
- West Virginia
What Should be Included (11 items)
- Company Details
- Business Purpose
- Capital Contributions
- Management Structure
- Members’ Rights
- Transferring Ownership
- Removing Members & Withdrawal
In the introduction paragraph, the name of the company should be mentioned, including its formation details such as principal office address, registered agent address, purpose, and any other entity details.
This LLC Operating Agreement (the “Agreement”) is entered into on [DATE], for the following entity:
- Company Name: [NAME OF LLC]
- State of Formation: [STATE]
- Principal Place of Business: [ADDRESS]
- Registered Agent: [NAME]
- Registered Agent Address: [ADDRESS]
Hereinafter known as the “Company”.
The business purpose is to establish the goals, operations, and activities of the company. This can be written in simple terms or by using the NAICS Codes for official classification. This can be helpful if there is a non-compete clause for the other members.
This Company’s main business purpose, as recognized officially, is to engage in the lawful business activity that includes the following industry(ies): [ENTER THE BUSINESS PURPOSE]
The Company may also engage in other business activity which is lawful under the laws of [STATE] and any other jurisdiction which it operates.
The ownership interest of each member should be mentioned in an operating agreement. There is no other document that states this information, so it is important to include each member’s name, address, and ownership percentage.
This Agreement recognizes that the following indfividuals are the owners of the Company:
- Member 1: [MEMBER’S NAME] with a mailing address of [ADDRESS] and a total ownership equal to [#]%.
- Member 2: [MEMBER’S NAME] with a mailing address of [ADDRESS] and a total ownership equal to [#]%.
- Member 3: [MEMBER’S NAME] with a mailing address of [ADDRESS] and a total ownership equal to [#]%.
Hereinafter known as the “Members”.
A capital contribution is a cash payment, assets, or other monetary value given to a company in exchange for ownership. The transfer of a capital contribution is complete upon the signing of the operating agreement by all members.
Some Members may contribute an asset, cash, or other vaulable property in exchange for their ownership in the Company (“Capital Contributions”). Any Capital Contributions made by members shall transfer its ownership upon the execution of this Agreement and described as follows:
- Member 1: [MEMBER’S NAME] with a capital contribution of [DESCRIBE].
- Member 2: [MEMBER’S NAME] with a capital contribution of [DESCRIBE].
- Member 3: [MEMBER’S NAME] with a capital contribution of [DESCRIBE].
A manager-managed LLC has all decisions made by a manager appointed by the owners (members). It is common for larger companies where a board of directors is established with a vote to determine each manager’s powers. A manager does not need to be a member necessarily and is generally compensated by salary or other payment.
A member-managed LLC has all decisions handled by its owners in accordance with the operating agreement. For a single-member LLC, this is by default, with the sole owner handling responsibilities. In a multi-member LLC, this is usually a majority of the owners that vote to agree on day-to-day operations.
The management of the Company shall be determined by Members under the following method:
☐ – Member-Managed. All Members shall have equal control and management of the Company with decisions being made on its day-to-day operations by a ☐ majority ☐ unanimous decision.
☐ – Manager-Managed. This Company elects to have its day-to-day operations be under the responsibility of individuals that may or may not have ownership interest (“Managers”). The Managers shall be elected by a ☐ majority ☐ unanimous decision of the Members.
There are certain rights that are elected to each member in relation to their ownership, voting rights, and other matters that may affect the value of the company. This is to be negotiated between the members and written in the operating agreement.
Members are entitled to specific rights to protect their ownership value in the Company. Such rights include, but are not limited to, the following:
- Books, Records, and Tax Returns. The Company shall maintain complete and accurate books and records of the Company’s business affairs as required by State statutes and the tax code. Such books, records, and tax returns shall be available to any of the Members upon written request and shall not be unreasonably withheld.
- Voting. Each Member shall be entitiled to an equal vote based on their ownership interest in the Company. Decisions made on behalf of the Company shall be in accordance with the agreed-upon management practices.
- Certificates. All membership interest shall be evidenced by a certificate of membership issued by the Company to all Members.
- Non-Compete. The Members understand that each will be made aware of sensitive proprietary information through their ownership in the Company. Therefore, the Members will be prohibited from being employed, engaging, consulting, or acting as an investor in the same business purpose as the Company in the [ENTER JURISDICTION]. This clause shall be enforced to current Members and to those that withdraw from the Company for a period of [#] thereafter.
Meetings are not required for an LLC, but it is common for a company to mention in an operating agreement that there are annual meetings. In addition, there should be rules allowing members to call for a meeting if requested.
An annual meeting of the Members is not required but may be held on a day and month of each year by providing at least [#] days’ notice. If a meeting is requested by a Member, it may be held in person or remotely by providing at [#] days’ notice and with at least 50% of the Members’ consent or by at least 50% of the Company ownership. At all meetings where items are put to a vote for Company decisions, the presence of Members holding at least 50% Company ownership shall constitute a quorum for the items to be decided.
Distributions are the payments made to the members in accordance with their ownership interest. If a company is profitable and doesn’t necessarily need excess funds (outside of cash reserves), distributions are commonly paid on a quarterly or annual basis.
Distributions made by the Company to its Members shall be paid in accordance with their respective ownership interest. Payments shall be made each ☐ quarter ☐ year unless otherwise agreed upon by the Members. Distributions may vary over time due depending on the business environment, cash reserves, and reinvestment in the Company.
It is common to include a clause that requires members to offer their interest to current ownership before selling to a third (3rd) party. In addition, some operating agreements can go even further, such that if a member dies, the family is required to sell the ownership interest at fair market value.
Transfer of Membership Interests.
Members are able to transfer their ownership interest under the conditions:
- Written Notice. Any sale or transfer of ownerhip interest must include at least [#] days’ written notice before transfering ownership to another party.
- Company Right of Refusal. Whether or not the new member is a current owner of the Company, the Company, as a whole, will have a first right or refusal to purchase the ownership interest under the same terms under the written offer. The Company must exercise their first right of refusal within [#] days of receiving written notice.
- Members’ Right of Refusal. If the Company rejects the offer to purchase, each Member, separately, shall have the a first right of refusal to purchase under the same terms as the written offer. Priority shall be given to Members with the highest ownership interest. All Members shall have [#] business days to act on deciding whether to exercise their first right of refusal.
- Consent. No member shall transfer their ownership interest without the written consent of all the members after notice has been received. The consent of the Members shall not be unreasonably withheld.
For removing members and those that would like to withdraw from the Company, there should be rules set up so that, for example, if the company is being sued and the members are liable, they cannot exit the Company without the consent of the other members.
Removal of Members and Withdrawal.
Members shall be given certain rights to protect themselves individually and that of the Company in regard to withdrawal and removing members as follows:
- Withdrawing Members. Members have the right to withdraw from the Company by providing written notice to the Members of at least [#] days. In the event of a withdrawal, the other Members shall have the first right of refusal to purchase the exiting Member’s shares for the value presented in a valid offer or to pay its fair market value. To calculate the fair market value, the ownership interest is to be appraised by more than one (1) appraiser with the average value of all appraisals to serve as the final sales price.
- Removing Members. Members can be removed ☐ with ☐ without cause from the Company by the ☐ unanimous ☐ majority decision of all the Members. In the event of a removal, the removed member shall receive fair market value for their ownership interest to be appraised by more than one (1) appraiser with the average value of all appraisals to serve as the final sales price.
Mentioning what should happen in the event the business activities end, otherwise known as dissolution. Generally, this occurs if the company is not profitable or the main principal dies. A dissolution may only occur upon the consent of all the members.
The Company may be dissolved, at any time, under any of the following events:
- By the ☐ unanimous ☐ majority support of all the Members.
- If a court order makes a judgment that involves the dissolution;
- If the Company has an end date as mentioned in the Articles of Organization or if there are any other events mentioned in any filing that requires dissolution; and
- If this Agreement requires dissolution upon the death or incapacity of any of the Members mentioned.
After the dissolution is filed, the Members shall make an accounting of the existing affairs, assets, and liabilities of the Company. If the assets exceed the liabilities of the Company, such assets shall be liquidated with payment made to the Members in accordance with their ownership interest.