What Is An LLC Operating Agreement 2024? Everything You Need To Know
A Limited Liability Company,[1] or LLC, is one of the most used business formations in the United States. An LLC allows for tax benefits for the owner or ownership interest group, limits personal liability in the case of legal action, and flexibility of management. Several online businesses will create a sample LLC operating agreement that will help when changing your business design from a sole proprietorship or single-member LLC to an operating agreement between separate business entities.
What Is An LLC Operating Agreement?
An LLC operating agreement is a document that outlines the financial and functional decisions of a business with one or more members. For multiple members, it explains the function of a board of directors, if the company’s business debts and taxes are paid by the company solely, what happens to remaining, members, if the other member dies or wants to sell, how profits and losses are accounted for and paid, and other regulations specific to the state in which the limited liability company is formed.
What Is An LLC Operating Agreement?
An LLC operating agreement is a document that outlines the financial and functional decisions of a business with one or more members. For multiple members, it explains the function of a board of directors, if the company’s business debts and taxes are paid by the company solely, what happens to remaining, members, if the other member dies or wants to sell, how profits and losses are accounted for and paid, and other regulations specific to the state in which the limited liability company is formed.
Without an operating agreement, members may not understand their role. Some states require LLC operating agreements while others do not. Operating agreements are similar to corporate by-laws and partnership agreements. In single-member LLCs, the LLC operating agreement[2] would include the structure of the organization, and that the management structure is separate from the interests and/or debts of the individual owner. Without it, the business is subject to the state’s default LLC rules.
How Do LLC Operating Agreements Work?
Operating agreements are filed with the state in which the company is founded. It works by structuring the finances and organizational roles for the various members of the LLC, and for a single-member LLC, it serves as a separation between the finances of the individual and the finances of the organization. The document serves as notice of verbal agreements and terms and ensures that the business operates according to the rules and regulations of the state. You can create your operating agreement, but the help of a lawyer may be helpful.
Reason To Have An LLC Operating Agreement
There are several reasons to create a legal document such as an LLC operating agreement. First, the operating agreement is a written agreement that proves that you own the business and how members’ capital contributions are made, both at the beginning of the business and how any additional capital contributions will be made. If you decide to sell down the road, this agreement will serve as proof that you own the business.
The agreement will also help to structure your protections for personal liability in the case of legal action, rules for an initial contribution, your ownership interest in the firm, the use of outside firms like an independent accounting firm if a member is caught up in outside legal action what happens to such member within the business, what happens to remain, members, if another member dies or wants to sell, and other things that will protect your assets. While those rules may be beneficial to you, they also may not. By setting up an LLC operating agreement, you set up the roles and responsibilities of your business in your best interests rather than the state default rules.
What Should Your LLC’s Operating Agreement Include?
There are several things that LLC operating agreements should include:
- The percentage of each member’s ownership of the business
- Voting rights for each member
- Responsibilities, powers, and duties of each member
- Distribution for business profits and losses
- Schedule of meetings, along with rules for future meeting dates
- Buy-out rules, buy-sell rules, and transfer-of-interest rules
Not all states require the limited liability company to have an operating agreement, however, these agreements are crucial in many cases. An operating agreement can be used to ensure one member does not sell shares without the knowledge of another member, that members cannot pull their funding without notice, and that the sale of the company follows specific regulations. The LLC operating agreement should be kept confidential and should be filed in a safe place with other important business documents.
How To Get An LLC Operating Agreement?
There are several ways to create a free LLC operating agreement yourself. Sites like Zenbusiness, and Northwest may offer a free version of this type of agreement that denotes membership interests, internal operations, division of the business from personal property and assets, and the business arrangement for every LLC member.
5 Basic Steps To Start An LLC In 2024
When you are setting up your business, the most important things are to separate the company from assets, determine members’ capital contributions, and determine the fair market value for stock buys. Here are five steps to help in setting up your LLC agreement:
Choose A Name for Your LLC
Your business name should be unique and will need a corporate designation such as Incorporated (Inc.) or Corporation (Co.). Do not use restricted words, trademarked words, or phrases as these are not allowed. Then, register your DBA. DBA stands for Doing Business As, this is necessary because you will be collecting money, fees, etc., under a name that is different from your legal name.
Choose Your Registered Agent
A registered agent will ensure you comply with all state regulations and their operating templates will help create rules for LLC members. Many will have an LLC operating agreement template for you to use.
File Articles Of Organization
Do not mistake articles of organization for an operating agreement. While they are similar, only an operating agreement will identify the business owner and other needed information. The articles are the basis for your partnership and include the name and address, the purpose of the business, and the type and number of stock shares that will be issued.
Create An LLC Operating Agreement
Using the LLC operating agreement template, begin setting up the agreement. This agreement will create rules for initial capital contributions for the initial and other members, company assets, a business plan, and each member’s interest in the company.
It will also house the various operational rules for the company’s structure, and the inclusion of new members, and will assign other rules the business should follow like generally accepted accounting principles. Without an operating agreement, these kinds of issues can cause problems that may leave all members of the business exposed to legal action or may cause the dissolution of the business.
Obtaining An EIN
At a minimum, the business will need a tax ID number from the Internal Revenue Service, and the state’s revenue agency, an Employer Identification Number[3] (EIN) may also be required. At the same time, open a corporate bank account. This account must be separate from any personal accounts held by the primary ownership group; this will protect personal funds from any business liabilities.
The Top 2 Free LLC Operating Agreement Services
| Northwest Registered Agent | Zenbusiness | |
| Award | Best Overall | Best Pricing |
| Pricing | $0 + State Fees | $39 + State Fees |
| Rating | 4.7/5 | 4.5/5 |
| Detail | Read Review | Read Review |
| Link |
Northwest Registered Agent
Northwest’s suite of tools offers business services at a reasonable price. The main difference between Northwest and similar entities is that Northwest only offers one paid plan for services. The initial cost is $39 to file the LLC paperwork; all other charges are due as per your state’s regulations. There is a separate option, called Pay In Full. With this option, which costs $225, Northwest will file the LLC, and provide agent services for one year, however, all other charges from state fees, etc., will still apply.
Northwest also has a strict no-data-selling policy and will provide pricing changes in advance. Northwest also offers the ability to pay by the month, with an auto-renew option.
ZenBusiness
ZenBusiness is a one-stop shop for small business preparation. Through ZenBusiness you can search for available business names, create articles of incorporation, find out the needed documentation for your state and federal filings and registrations, obtain an EIN, and build the business’s web presence through domain names, email, and domain privacy protection.
Zenbusiness offers three tiers of members.
- For $49 (Starter Plan), you can form your business within 3 to 4 weeks, file LLC paperwork, get an annual compliance service, search for business names, have phone/email support, and have online document access. The Starter Plan does not automatically renew each year.
- For $199 (Pro Plan), you get all of the Starter Plan benefits, plus extras including an operating agreement, expedited filing services, a virtual business guide, and Google Ads credit. The Pro Plan automatically renews each year.
- For $299 per year (Premium Plan), you get all of the Starter Plan and Pro plan benefits plus extras including a business website, a business domain name, and a business email address. The Premium Plan automatically renews each year.
Final Thoughts
There are many benefits to creating an LLC operating agreement. Once your LLC is formed and the proper paperwork is filed with the state, your assets are separated from company assets, you receive some tax benefits, and will be set up to operate within the regulations of your state. An LLC operating agreement template offers an additional explanation of the rules and roles of the various partners and general operating principles. This business structure may be critical to how your business grows over time and even if it will be a success. Filing this type of agreement is a benefit to the owner or owners.
Frequently Asked Questions (FAQs)
Every business can offer stock. Stock certificates are used to help finance the initial business release or add an influx of cash for expansion projects. For record-keeping purposes, the name of the person purchasing shares, the number of shares purchased, the cost, and when purchased should be recorded. Stock certificates can be either digital or physical.
This type of agreement allocates company funds, identifies company property, and sets the time for regular member meetings. It will determine the powers of a board of directors, how such powers will be used and if all the members will have voting rights. Limited liability companies must follow member wishes and must have rules for company affairs. This agreement will be an internal document denoting members’ ownership interests, how other members may join, identify a lending member, how is authority conferred, and how disputes between two or more members will be decided. The agreement will determine if boards must have unanimous vote results, how a capital account is set up, and if an accountant will be used, and requirements like how to maintain insurance, follow generally accepted accounting principles, distribution of assets, and buy-in or sell-out for various members.
A multi-member LLC operating agreement is a legal contract that outlines the agreed-upon ownership structure and sets forth the governing terms for a multi-member LLC. In addition, it sets clear expectations about each member’s powers, roles, and responsibilities.
Get together with your co-owners and a lawyer, if you think you should (it’s never a bad idea), and figure out what you want to cover in your agreement. Then, to create an LLC operating agreement yourself, all you need to do is answer a few simple questions and make sure everyone signs it to make it legal.
Most states do not require LLCs to have this document, so many LLCs choose not to draft one. While it may not be a requirement to have an operating agreement, it’s actually in the best interest of an LLC to draft one. And by drafting it, you’re referring to creating a written operating agreement.
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- Irs.gov. (2017). Limited Liability Company (LLC) | Internal Revenue Service. [online] Available at: https://www.irs.gov/businesses/small-businesses-self-employed/limited-liability-company-llc.
- Sec.gov. (2023). Limited Liability Company Operating Agreement. [online] Available at: https://www.sec.gov/Archives/edgar/data/1345691/000119312512119426/d230618dex1012.htm.
- Irs.gov. (2017). Employer ID Numbers | Internal Revenue Service. [online] Available at: https://www.irs.gov/businesses/small-businesses-self-employed/employer-id-numbers.