Operating Agreement

What Is the Agreement About?

An operating document is an internal business contract between the member(s)  of the LLC which outlines how the business will be governed. It highlights the rights, responsibilities and obligation of each member or manager towards the firm. This agreement is similar to the by-laws of a corporation or partnership agreement.

The agreement lists out the terms and condition agreed by the member(s) of the LLC. It also mentions various constituencies to handle myriad of situations. Example what happens when any of the member does not fulfill his duties or what happens why any of the member decides to leave the firm.

So, this agreement act as a blueprint which can help resolve any of the any of the possible issue/conflict which may arise in the future. It reduces the confusion between the member(s) and eases out the business operation.

Why is it Required?

While most of the states in US do not require a written operating agreement but without it, the business is prone to confusion, disputes and possible waiving off the limited liability which LLC enjoys.

In business, there could be disagreements or financial disputes between the member(s). Provision to handle such disputes can be made in the agreement thus saving lengthy and costly legal route. At the same time without the operating agreement, such cases would be governed by default LLC statutes of the state. The default statutes are applicable for LLCs, which do not have the operating agreement drafted or the agreement does not address all the scenarios.

In such cases, the default state statutes becomes the binding authority.

Also, not having an operating agreement indicates that business was not professional enough to complete all the business formalities. When such businesses are sued, the court may not uphold the limited liability status of the LLC. In legal terms, this is known as piercing the corporate veil.

Below you can download, state-specific operating agreement. States in which the agreement is mandatory are marked in bold.

What points need to be added in the Agreement?

Broadly, the agreement should cover the following fundamental points:

  1. Rights, responsibilities, and expectation from each member
  2. Percentage Ownership of Member(s)
  3. Capital contribution and how profit/loss/expenses are divided
  4. Voting rights
  5. Tax information and accounting method used
  6. Provision to add/remove any member
  7. In case of death of any member, how the business will be impacted
  8. How buyout/buy-sell of membership interest will be handled
  9. Business liquidation rules
  10. Non compete clause

Does the agreement need to be filed anywhere?

Unlike article of formation/incorporation, the agreement need not be filed anywhere. Neither does it require to be notarized. For the document to be effective all it needs to be signed by all the member(s) of the LLC.

The agreement should be kept at the principal office along with the other business documents. And each member should be given the copy of the document.

To summarize, the operating agreement is one of the most important but often overlooked document for your LLC.  We highly encourage every LLC to have one. And using the free operating agreement template shared on our site, you can easily draft the document.

Last Updated: 12/10/2018