LLC Operating Agreements
Corporations have bylaws. Partnerships have partnership agreements. With an LLC, the operating agreement controls how the company is run. Most importantly, it governs the relationship between the owners.
LLC's are inherently very flexible entities. You can have passive investors and active managers. You can share profits and losses in proportion to ownership of stock, or in any other proportion agreed upon by the members.
Instead, you want to create your own operating agreement.
Determining Ownership--the LLC Operating Agreement
Your LLC's operating agreement spells out how much ownership each member has. Many companies choose to have ownership be proportional to capital invested. In other words if Member A invests $1,000 and Member B invests $2,000, then B will have twice as many shares as A.
However, you don't have to allocate ownership in proportion to capital contributions. A passive investor might contribute the majority of the capital, while a member that actively manages the company will own shares in excess of his capital contributions. For example, Smith, a passive investor, might invest $10,000 in the LLC in exchange for 40% of the shares, while Jones--the manager and visionary of the company--might contribute $5,000 in exchange for the other 60% of the company. Any combination can be chosen by the members.
Operational Control
Not only does the operating agreement control the ownership of shares in the LLC, it also spells out how voting operates. You could choose to have one share equal one vote. Or, the operating agreement could give each member an equal say regardless of the number of shares held.
The agreement will also spell out what constitutes a majority for making major decisions affecting your company. You will want to spell this out because each state's default rules are different.
For example, in Delaware, a simple majority of 51% is enough to allow a merger of the company. In some other states, it takes a two-thirds vote to approve a merger. You will want to decide yourself, based on your own circumstances, what number of votes are needed for major decisions like mergers and liquidating your LLC.
Succession Planning
No one wants to think about this when starting their company, but what happens if a member dies or retires? The operating agreement can provide, for example, that the remaining members are allowed the first opportunity to buy the leaving member's shares.
LLCs can protect assets by removing the voting power of shares taken involuntarily from a member. This is an advanced topic and you should consult an attorney on how to use LLCs for asset protection.
Protecting Limited Liability of Single Member LLCs
Some people believe that if you're a single member LLC, there is no need for an operating agreement. Afterall, the operating agreement is essentially a contract among members as to how they'll run the company. Why would you need a contract with yourself?
However, an operating agreement is useful because it can help preserve your company's limited liability status. If you operate your single member LLC without an operating agreement, then your business begins to look very similar to a sole proprietorship.
If that happens, then a judge could pierce your corporate veil under the
alter ego theory, holding that your LLC and you as an individual are actually
one and the same.
With a formal operating agreement, you make it clear
that you as an individual and the LLC are two separate entities.
How
to Write an Operating Agreement
Most online incorporation companies
include a basic operating agreement for your LLC as part of the
package.
Other Operating Agreement Articles of
Interest
Do
you need an attorney to draft your operating agreement?
Find out when
your situation requires an attorney, and when you can use a low-cost template or
"semi-custom" operating agreement.
Your Operating Agreement Questions...Answered
Click below to see answers to others' questions about Operating Agreements...
Members and Ownership
Do members of an LLC have to own units in the Company or can there be members with out any ownership units?
Answer
You're not a member if you don'...
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Is this operating contract valid?
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Do I need to file an operating agreement within the state
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change ownership
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Does the LLC need to be notarized?
Answer
I'm not aware of any LLC formation documents that need to be notarized.
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Answer
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Officer Duties
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Does an LLC need a separate document spelling out the officer duties and responsibilities?
Answer
Those will usually be contained in the Operating ...
No capital accounts based on equal membership interests. Can we do it?
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Hello,
Our LLC of three members would like to have equal ownership and membership control, regardless of capital contributions made by individuals. What ...
Distributions to members
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Operating Agreement
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Insurance
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Do you have to carry special insurance when you are a LLC?
Answer
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LLC Question
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Withdraw from a Florida LLC
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I filed an LLC in Florida. I am the managing
member and another person is a member and
the registered agent.I no longer wish to have
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Can a member be silenced by other members without reason?
Answer
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to whom to file the single member LLC operating agreement?
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I heard that along with obtaining your EIN for federal you are also supposed to apply for a state filing number.
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I am forming a real estate LLC with my wife. Do we need an operating agreement? We split the ownership 50%-50%.
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Answer
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Notarizing the Operating Agreement
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I am looking to start an LLC with one partner. We will have to hire a CEO soon, as I do marketing and he does programming.
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Manager Managed, Single Member LLC
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Is it possible to have a single member LLC, that is managed by a another individual, that has no ownership interest in the company?
If yes, what agreements ...
Succession Planning
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Is "succession planning" in an operating agreement essentially a section that deals with the transfer of membership interest in the event a member wishes ...
managing member
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can you have a manager and a managing member?
What is the difference between the two?
Answer by Simon
A manager, as used in the context of a ...
