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An operating agreement, in simple terms, is a legal document that establishes the rights and responsibilities for each member of a Limited Liability Company (LLC). Not all states mandate LLCs to have an operating agreement, so some LLCs may not elect not to write one.
If your state makes it a requirement or you find it important to have one after considering the benefits, then you will want to learn how to write an LLC operating agreement.
This article discusses the step-by-step process of writing a LLC operating agreement as effortlessly as possible. This guide will also teach you other fundamentals of an operating agreement, including the various types and critical elements to include in your operating agreement.
A written LLC operating agreement is a legal document used by Limited Liability Companies (LLCs) to establish and outline the rights of each LLC member. The agreement also provides details about the LLC’s management, including voting, decision making, meetings, and more.
Generally, LLCs use this document to govern their internal operations to suit the specific needs of each member. Everyone who signs an operating agreement is bound by the terms of the agreement.
While operating agreements aren’t mandatory for many states, it is strongly recommended to draft one when setting up your LLC because of their benefits, especially if there is more than one member.
A few of these benefits include ensuring members and owners adhere to the business’ rules and responsibilities set in the operating agreement, allowing owners to monitor the company's internal operation according to their specifications. Without a written LLC operating agreement, it means your business will run based on your state's default rules.
Here is an article to learn more about LLC operating agreements.
An essential aspect of learning how to write an operating agreement is understanding that there are different types and knowing when to use which type. Types of LLCs operating agreements are:
Single-member LLCs do not require operating agreements. However, most LLC lawyers and business lawyers often recommend that primary owners of the LLCs have one, signed and dated, for formality’s sake.
Most importantly, an LLC operating agreement becomes handy when the primary member dies. You can add as many custom terms to the agreement.
A multi-member LLC operating agreement applies to member-managed and manager-managed LLCs.
The written operating agreement for member-managed LLCs puts the members in charge of the internal operations of the company. Internal decisions are made via a voting system, either based on percentage interests or per person.
This operating agreement may be customized, assigning unique responsibilities and/or rights to each member. Member-managed operating agreements are often used in joint ventures between companies, family businesses, etc.
Manager-managed operating agreement streamlines the leadership of a company to one or more third-party managers. These managers are responsible for the business' operations and are typically elected to be a manager by company members. When writing a manager-managed LLC operating agreement, ensure you set limitations on the manager as you deem appropriate.
LLCs may be as sophisticated in their structure. One more complex structure is the multi-class structure, which divides members into separate classes, assigning unequal responsibilities, rights, and preferences to each group member.
Multi-class operating agreements are often written to cater to such an organizational structure. The agreements will include names of each member in each class plus their assigned rights or responsibilities. There are no restrictions on how many classes of membership you can include in a multi-class operating agreement. They are often used in succession planning, estate planning, etc.
LLCs use protected series LLC operating agreements to manage multiple assets or properties, separating each property like they were a separate entity.
Typically, this type of LLC operating agreement allows LLCs to:
The protected series LLC operating agreements are typically drafted by LLC lawyers.
Here is an article about the types of LLC operating agreements.