How To Draft An LLC Operating Agreement

Is your business entity formation a limited liability company (LLC)? If yes, you may be considering drafting an LLC operating agreement.

An LLC operating agreement is a contract which clearly defines how the business operates. It also determines which members govern the business.

While an LLC operating agreement is not required in every state, it is recommended every LLC drafts this document. This agreement will guide the LLC and describe the general functions of the LLC’s members, voting formalities, allocation of profit and loss, and special tax classifications.

Here’s how to draft an LLC operating agreement.

Ownership

Some LLCs decide to form one of three LLC structures. These include single member LLC, member managed LLC, and manager managed LLC. Note which LLC structure your company is operating as in this document.

Then, determine the portion of the LLC’s profits, losses, and assets for each member. This may be divided based on initial investment. For example, let’s say one member runs the LLC as a single member LLC. They receive 100% of everything. If there are two members who invested the same amount into the LLC, the amount is split on a 50/50 basis. Ownership rights should be discussed with all members. This ensures everyone understands how these profits, losses, and assets are divided.

Rights and Responsibilities

An LLC operating agreement outlines the daily duties of each member. This may sound like a basic area to cover, but it is important. Each member should know their responsibilities.

This ensures a general understanding in how much of a say each person has in making business decisions. It also helps to resolve any conflicts or disputes within the LLC.

Joining and Exiting the LLC

What happens if the business wants a new member to join the LLC? An LLC operating agreement plans by outlining rules for gaining and losing LLC members.

What will new members receive for joining the LLC? What should their initial investment look like? Take similar guidelines into consideration for departing members. What will they be entitled to? How long should they remain involved with the business? Review this section with any other members of the LLC. This ensures they understand the guidelines and can offer their feedback.

Dissolution

An LLC may dissolve its business for many reasons. The passing of a member could lead an LLC’s dissolution. Or the business may dissolve because it has simply run its course.

An LLC operating agreement outlines terms for dissolution. These terms include guidelines for how to divide remaining assets once the LLC’s debts are paid and rules for whether former members may start or run businesses based on the idea of the dissolved LLC.

Severability Provision

An LLC operating agreement should have a severability provision.

This is standard legal boilerplate. It will say, if a provision of the operating agreement runs contrary to state or federal law, all other aspects which are not contrary to the law should still survive. Otherwise, a small legal oversight could be enough to invalidate the entire agreement.

Draft an LLC operating agreement today. Contact MyCorporation at mycorporation.com or give us a call at 877-692-6772.

Deborah Sweeney

Deborah Sweeney is an advocate for protecting personal and business assets for business owners and entrepreneurs. With extensive experience in the field of corporate and intellectual property law, Deborah provides insightful commentary on the benefits of incorporation and trademark registration. Education: Deborah received her Juris Doctor and Master of Business Administration degrees from Pepperdine University, and has served as an adjunct professor at the University of West Los Angeles and San Fernando School of Law in corporate and intellectual property law. Experience: After becoming a partner at LA-based law firm, Michel & Robinson, she became an in-house attorney for MyCorporation, formerly a division in Intuit. She took the company private in 2009 and after 10 years of entrepreneurship sold the company to Deluxe Corporation. Deborah is also well-recognized for her written work online as a contributing writer with some of the top business and entrepreneurial blogging sites including Forbes, Business Insider, SCORE, and Fox Business, among others. Fun facts/Other pursuits: Originally from Southern California, Deborah enjoys spending time with her husband and two sons, Benjamin and Christopher, and practicing Pilates. Deborah believes in the importance of family and credits the entrepreneurial business model for giving her the flexibility to enjoy both a career and motherhood. Deborah, and MyCorporation, have previously been honored by the San Fernando Valley Business Journal’s List of the Valley’s Largest Women-Owned Businesses in 2012. MyCorporation received the Stevie Award for Best Women-Owned Business in 2011.