Operating agreement (LLC)

An LLC operating agreement is a legal document that outlines the ownership structure, member responsibilities, and operating rules of a limited liability company. While not filed with any government agency, it is a critical internal governance document.

71 steps across 12 sections

1. Single-Member LLC

  • Reinforces the separation between personal and business assets (protecting the corporate veil)
  • Documents the LLC's management and financial structure
  • May be required to open a business bank account
  • Provides a framework if you later add members

2. Multi-Member LLC

  • Define each member's ownership percentage and capital contributions
  • Establish voting rights and decision-making processes
  • Set rules for profit and loss distribution
  • Address what happens when a member wants to leave, dies, or becomes incapacitated
  • Prevent disputes by documenting agreed-upon rules in advance

3. 1. Company Information

  • Legal name of the LLC
  • Principal office address
  • Registered agent name and address
  • State of formation
  • Date of formation
  • Purpose of the business (can be broad: "any lawful business")

4. 2. Members and Ownership

  • Names and addresses of all members
  • Ownership percentages
  • Membership classes (if any)
  • Process for admitting new members
  • Membership certificates (optional)

5. 3. Capital Contributions

  • Initial capital contributions from each member (cash, property, services)
  • Schedule for additional contributions (if planned)
  • Consequences of failing to make required contributions
  • How additional contributions affect ownership percentages
  • Whether contributions earn interest or create loans

6. 4. Management Structure

  • All members participate in day-to-day management
  • Decisions typically made by majority vote
  • Each member has authority to bind the LLC
  • Simpler structure, best for small LLCs where all members are active
  • One or more designated managers (who may or may not be members) handle operations
  • Members act more like passive investors
  • Only managers have authority to bind the LLC
  • Better for LLCs with passive investors or numerous members
  • Who the managers are (if manager-managed)
  • Scope of management authority

7. 5. Voting Rights and Decision-Making

  • Voting power (per capita, by ownership percentage, or other method)
  • Ordinary decisions: simple majority, supermajority, or unanimous
  • Major decisions requiring higher approval thresholds:
  • Selling major assets
  • Taking on significant debt
  • Admitting new members
  • Amending the operating agreement
  • Dissolving the LLC
  • Quorum requirements for meetings
  • Proxy voting allowance

8. 6. Profit and Loss Distribution

  • How profits and losses are allocated among members
  • Default: proportional to ownership percentage
  • Can be allocated differently ("special allocations") — must follow IRS rules for partnerships (IRC Section 704(b))
  • Timing and frequency of distributions (monthly, quarterly, annual)
  • Guaranteed payments to members (similar to salary)
  • Tax distribution provisions (ensure members receive enough to cover their tax obligations on LLC income)

9. 7. Meetings

  • Frequency of member meetings (annual at minimum, more as needed)
  • Notice requirements (how many days in advance)
  • How meetings are called (who can call a special meeting)
  • Virtual meeting allowance
  • Minutes and recordkeeping

10. 8. Transfer of Membership Interests

  • Right of first refusal — existing members get first option to buy a departing member's interest
  • Restrictions on transfers to outsiders
  • Required approval for transfers (unanimous, majority, or manager)
  • Valuation method for transferred interests
  • Tag-along and drag-along rights

11. 9. Buy-Sell Provisions

  • Triggering events: death, disability, retirement, voluntary withdrawal, bankruptcy, divorce, breach of agreement
  • Valuation method: appraised value, book value, formula-based, agreed-upon value, or multiple of earnings
  • Payment terms: lump sum, installments, or funded by insurance
  • Life insurance funding: LLC or members purchase life insurance to fund buyouts
  • Timeline: how long the LLC or remaining members have to complete the buyout

12. 10. Dissolution

  • Events triggering dissolution
  • Required vote to dissolve
  • Winding-up procedures
  • Distribution of remaining assets (after debts are paid)
  • Order of priority: creditors first, then capital contributions, then profits

Common Mistakes

  • Not having one at all
  • Using a generic template without customization
  • Failing to address member exit scenarios
  • Not specifying a valuation method
  • Equal ownership with no tiebreaker

Sources

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