What Is An LLC Operating Agreement?
A Limited Liability Company (LLC) Operating Agreement, sometimes referred to as an LLC Company Agreement, is a legally binding document that details the rights and obligations of each member of your LLC.
The agreement is between all the LLC members of the limited liability company and it defines a set of rules according to which the company will be run.
An operating agreement for LLC should display how a company is organized, who the members are, and which portion of the company they own.
From daily operations like invoicing and payroll to what would happen in certain scenarios, such as a member wanting to leave an LLC, an operating agreement is crucial to your company, and you should create this document as soon as you form your LLC.
Do I Need An Operating Agreement for My LLC?
If you form a limited liability company in a state where the laws require you to create an operating agreement, you have no choice but to have one.
Here is a list of states that require LLCs:
- New York
In the table below, we’ve outlined what each of these states typically requires in an LLC operating agreement:
|State / Requirements||Type of Form Accepted||Requires Specific Provisions||Required Time of Execution|
|California||Written or oral agreement||No||None|
|Delaware||Written, oral, or implied agreement||No||Around the time of filing for the formation of the LLC|
|Maine||Written, oral, or implied agreement||No||Around the time of filing for formation of the LLC|
|Missouri||Written or oral agreement||Yes||None|
|New York||Written agreement||Yes||None|
Remember, the table above is just a guideline. It’s always best to consult your state’s rules to make sure you’re not missing anything.
States often have different LLC operating agreement templates, which is why you must ensure you use the correct one for the location of your business.
Why Do You Need to Use an LLC Operating Agreement?
For businesses that are organized in states that require an operating agreement, not having one means you are breaching state law.
You may get away with not having one when things are going smoothly. However, the moment the company runs into any legal action or an audit is done, the member’s personal assets are put on the line.
This is because failure to comply with the state rules may put your LLC in danger of not being recognized as a separate entity from its members, which is probably the exact reason why you formed an LLC in the first place.
For those who are organized in a state where an operating agreement is not required, there are several reasons it’s advisable to have one anyway:
To fortify the existence of the LCC as a separate entity from its members
Having a defined set of rules on how the company is run and how decisions are made shows that it is separate from its LLC members.
It shows that the company’s acts are not the acts of the members, which means its liabilities cannot be charged against its members.
To avoid state default rules
An operating agreement for LLC sets the rules on how the company runs. If your LLC does not create an operating agreement, then there are state default rules regarding those matters which will apply to your company.
To avoid conflicts between LLC members
The operating agreement outlines each member’s rights, duties, and obligations. Having this makes things black and white and greatly diminishes the possibility of confusion or mistakes of fact, which lead to conflicts between members.
The operating agreement also sets out how it may be settled if members do not agree on something.
To tailor the rules according to your company’s specific needs
As a corollary of avoiding state rules, having an operating agreement allows the members of an LLC to configure the operations to what works for them.
As an added benefit, sitting down to create an operating agreement forces you to make decisions that you may otherwise have never even considered, like how long the life of the company should be or what happens if one member wants to sell their part in the company.
What If an LLC Has No Operating Agreement?
Not having an operating agreement for LLC is dangerous as the LLC is essentially invalid, and its members are not protected from personal liability.
There are five states that require operating agreements—namely California, Delaware, Maine, Missouri, and New York—but even if your state does not require one, an LLC operating agreement is vital to your organization.
The agreement is evidence that a limited liability company has been formed and that the company is not a sole proprietorship or partnership in disguise.
Without this agreement in place, disputes between members and officers are subject to a state’s de facto LLC laws, which may not be in your favor.
How Do I Change the Terms In an LLC Operating Agreement?
Any changes to a company agreement for LLC must be documented in writing and signed by all the parties involved in the LCC—this is the only way you can change the terms of the agreement.
Is an LLC Agreement the Same as an Operating Agreement?
An LLC agreement and an LLC operating agreement are the same, and these two terms are often used interchangeably. The document can also be called an LLC company agreement.
Do All Members of an LLC Have to Sign the Operating Agreement?
Yes, all the members and officers of a limited liability company must sign the operating agreement, and in doing so, they are bound to it.
If a member does not sign the company agreement for LLC, they are not legally obligated to follow the rules and regulations laid out in the document.
Our free LLC operating agreement template includes dedicated sections for each member’s signature.
How Do I File My LLC Operating Agreement?
Some states require you to create an operating agreement, but you will not need to file this internal document with the Secretary of State.
Rather, certain states will require you to file your business’s Articles of Organization and any annual reports.
Why Would an LLC Require Unanimous Consent on Some Actions but Not Others?
Within your operating agreement you may require unanimous consent for certain actions within your company. This is especially true when the business decision in question will impact the company’s success.
You might want to consider including unanimous consent in your operating agreement for LLC for the following critical issues:
- The assignment of ownership rights of company property.
- Company liabilities incurred over a fixed dollar amount.
- Incurring expenses over a fixed dollar amount.
- The releasing of any company claim except for payment in full.
Single Member vs. Multi-Member LLC Operating Agreement
The content of an LLC operating agreement largely depends on how many people own a particular business. If you are the sole member and owner of a business, you’ll need to compile a single-member LLC agreement. However, if the business is owned by two or more people you will need to compile a multi-member LLC agreement.
One of the key differences between these two documents is that a multi-member operating agreement must specify whether the company is member-managed or manager-managed.
Let’s take a closer look at the differences between these two concepts:
- Member-managed: All members have equal authority to run the business’s day-to-day operations. The company also needs to have the majority of its members’ approval when securing a loan or making key decisions.
- Manager-managed: This means that one person is appointed to oversee the company’s day-to-day operations. Members of a company that are not in this role will be responsible for strategic decisions.
There are also different tax considerations that should be specified on a single-member and multi-member LLC operating agreement.
Single-member LLCs are taxed as sole proprietorships, whereas multi-member LLCs will be taxed as general partnerships—unless they change their tax treatment.
A multi-member operating agreement also serves as a binding contract between the company’s members.
Both of these agreements separate the member(s) from the company and protect each person’s assets if the business runs into financial difficulties.
Do I Need a Business Plan If I Have an LLC Operating Agreement?
Both LLC Operating Agreements and business plans are crucial documents for your business. You are not legally required to develop a business plan. However, it is advisable to have one in place.
These two documents will overlap somewhat, but they have separate uses.
- A business plan defines how a company will achieve its goals and objectives and is an important document when attempting to secure investment and funding.
- An operating agreement outlines how the business will be run, including daily operations and the duties and responsibilities of each member of the LLC.
Can I Change My Operating Agreement?
The LLC Operating Agreement template that we provide makes it easy for you to create an operating agreement with a simple and user-friendly 100% private and secure tool.
An operating agreement can be updated at any time, as long as the changes are approved by all of the company’s members.
There are a few reasons why you may need to change your LLC operating agreement. This includes:
- More capital is added to the business.
- A new member joins the company, or a current one leaves.
- The governance of the organization changes.
These amendments also have to be in the interest of the majority of the company’s members and be approved through a vote.
If you make any changes to your LLC operating agreement, it’s important that you don’t leave out any key details from the original document. Although you don’t need to file the amendments with the state, you should keep the new operating agreement as an internal document.
Can I Write My Own Operating Agreement for My LLC?
Although input from a legal professional can be helpful when writing operating agreements, no one understands your company better than you.
If you take the time to set out what your company needs and configure your own operating agreement according to that, you will do just fine.
Online platforms like Form Pros allow you to create a sample LLC operating agreement in just a few clicks. This will help you eliminate common mistakes and avoid legal fees. We’ll go into more detail about this later on.
What Are the Most Common LLC Company Agreement Mistakes to Avoid?
- Not having an operating agreement. As a result of an operating agreement not always being required, many businesses will skip formulating this document. As a result, these organizations often end up with rules that don’t work for them.
- Getting a ready-made template for an operating agreement. There are many free LLC operating agreement templates that you can download from the internet. Unfortunately, some make a habit of just downloading templates and filling in their particulars. This means you are not considering each provision or glossing over the details could just as easily leave you with rules that don’t work for your company, which defeats the purpose of having an operating agreement. Using our LLC operating agreement template, you can ensure that your agreement is solid and professionally developed.
- Delaying the creation of the operating agreement. While in theory, members of an LLC who are in conflict are perfectly capable of executing an agreement; in practice, they will rarely do so because either side will want provisions that will put them in a better position.
What Information Should Be in My LLC Operating Agreement?
The LLC operating agreement should outline the rules and details that govern how a business will be run. This includes:
The composition of the company:
- The company’s name.
- Head office address.
- The industry in which the business operates.
- Service description.
- The company’s purpose and goals.
It should also include information about all of the LLC’s members, including:
- Their full names and postal addresses.
- Ownership and member duties.
- The value of their capital contributions to the company.
- Ownership interest and percentage.
The LLC operating agreement should also specify:
- How company assets will be distributed if a member leaves or the company closes.
- If members can leave the LLC voluntarily.
- Guidelines on admitting new LLC members.
- Voting procedures if there are changes to the operating agreement.
Decision-making processes and management:
In the operating agreement, make sure that you specify whether members will run the company or if a manager will be appointed.
It’s also important to outline how the voting process works. This includes the weight of each member’s vote, which members have voting rights, and how often meetings should be held.
The operating agreement should specify how disputes will be handled, actions that would require unanimous approval, and which members can sign contracts on behalf of the company.
You should also outline how administrative processes will be managed. Typically, this will include:
- The company’s tax classification (entity, partnership, corporation).
- When the business’s fiscal year-end is.
- How profits and losses will be divided.
- Which documents and statements should be included in the annual report.
Do I Need to Use A Lawyer, Accountant, or Notary to Help Me?
Input from a legal professional can always help when it comes to formulating agreements.
However, if you take time to understand what your company needs and you create an operating agreement according to those specific needs, you should be fine without a lawyer.
Why use our free LLC operating agreement template generator?
Our form generator makes the process of creating your own LLC operating agreement easy and foolproof. You will be taken through each item that needs or allows configuration to ensure you make the right choices for your company’s requirements. This minimizes the chances of omitting important details from your operating agreement.
We also offer a subscription plan so that you can create unlimited operating agreements at a lower cost.
Why use our LLC operating agreement generator?
- Easy to use.
- Eliminates mistakes.
- 100% money-back guarantee.
- 100% private and secure.
- Legally binding documents.
- No need to hire a law firm, accountant, or notary.
Form Pros also doesn’t require the installation of additional software, which will save you even more time and money.Create Free LLC Operating Agreement