Operating Agreement

Your LLC’s Operating Agreement

**Short Answer: Your Operating Agreement explains how the LLC will be managed, how taxes are paid, and how profits and losses are distributed. It’s basically the “rules” of your LLC.**


Video Transcript:

An operating agreement is an agreement for the members of your LLC that explains how the LLC will be managed both financially and operationally. Your operating agreement also spells out how much of the LLC each member owns. You can have one member who owns 100%, you can have two members with a 50-50 split, a 60-40, or 70-30 split, anything really, or you can have three or more members and split the ownership any way that you’d like. The LLC is a flexible business structure. There’s no limit on the number of members that you can have and there are no restrictions on how you split the ownership of the company. Unlike your LLC formation documents, the operating agreement does not need to be mailed anywhere. You don’t need to mail to the state and you don’t need to mail to the IRS. It’s strictly an internal document. This means you’ll just need to keep a copy with your business and LLC documents. The purpose of your operating agreement is to spell out who the members are and what percentage of the LLC they own, also known as their membership interest. It also defines how the LLC is managed, how taxes are paid, and how profits and losses are distributed amongst the members. Remember your LLC can be owned by one person, called a single-member LLC, or your LLC can be owned by two or more people, called a multi-member LLC. In order to complete your operating agreement, you will need have some basic information handy: the formation date of your LLC, the name and address of the registered office and the registered agent, the general business purpose of the LLC, members’ percentages of ownership, and the names of the members and their addresses. Don’t worry, your final operating agreement is not set in stone. You can make changes as needed. That’s one of the benefits of an LLC is the flexibility of managing your business. The operating agreement is a working document that is meant to be fluid and allow for changes as your business grows. If you want to make simple changes such as change of address for a member or changing your registered agent or your registered office, you just need to revise the original operating agreement and sign it. If ever you need to make complex changes like one member purchases the interest of another member or you decide to raise financing with investors, it’s best to hire an attorney because making changes like that can have negative legal and tax consequences if done incorrectly. Once all the changes are made, you’ll need to print out the new operating agreement and, again, have all the members sign it. It’s all best practice to keep a copy of all versions of your operating agreement so that you have a history of the changes that were made. You may need to provide a copy of your operating agreement to a lender if you’re obtaining financing, a title company if you’re purchasing real estate, accounting and tax professionals for financial assistance, lawyers of legal advice, and potential investors or partners who have an interest in your business. If you’re involved in a legal battle, the court will likely ask for your LLC’s operating agreement, too. Having one can help prove to the court that you have a legitimate LLC and that you’re running your business properly. If the courts were to find you running an LLC without an operating agreement, they may go after your personal assets. You may be asking yourself, ‘Where can I get a copy of an operating agreement?’ Unfortunately, none of the states provide an operating agreement, but you have a few options. You can pay an attorney $200 to $500 an hour to draft one. Try martindale.com or lawyers.com. You can buy one from a website between $50 and $100. See myllcoperatingagreement.com, or lawdepot.com. You can write one yourself and fill out a template. The cost should be minimal. Try docracy.com or nolo.com, or you can use the one that we provide so you can customize it to fit your business.

What is an Operating Agreement?

An Operating Agreement is an agreement for the member(s) of your LLC that sets forth how the LLC will be managed both financially and operationally.

Your Operating Agreement also spells out how much of the LLC each member owns.

You can have 1 member who owns 100%, you can have 2 members with a 50/50 split, 60/40, 70/30 (anything really!), or you can have 3 or more members and you can split the ownership any way you’d like.

The LLC is a flexible business structure. There is no limit on the number of members you can have. And, there are no restrictions on how you split the ownership of the company.

Internal Document

Unlike your LLC Formation Documents, the Operating Agreement does not need to be mailed anywhere.

You do not need to mail it to the State.

You do not need to mail it to the IRS.

It is strictly an “internal document”.

This means that you will just keep a copy with your other business documents.

Purpose of the Operating Agreement

Again, the purpose of the Operating Agreement is to spell out who the member(s) are and what percentage of the LLC they own, also known as their “membership interest”.

It also defines how the LLC is managed, how taxes are paid, and how profits and losses are distributed amongst the member(s).

Remember, your LLC can be owned by one person (called a Single-Member LLC) or your LLC can be owned by 2 or more people (called a Multi-Member LLC).

What You Need for Your Operating Agreement

In order to complete your Operating Agreement, you will need some basic information.

• The formation date of your LLC.

• The name and address of the Registered Office and Registered Agent.

• The general business purpose of the LLC.

• Member(s) percentages of ownership.

• Names of the Members and their addresses.

Your final Operating Agreement is not “set in stone”. You can make changes as needed.

Making Changes to your Operating Agreement

One of the benefits of forming an LLC is the flexibility of managing your business.

The Operating Agreement is a working document that is meant to be fluid and allow for changes as your business grows.

If you want to make simple changes (such as a change of address for a member or changing your Registered Office or Registered Agent), you’ll need to revise the original Operating Agreement.

If, however, you need to make complex changes (for example one member purchases the interests of another member, or you decide to raise financing with investors), it is best to hire an attorney. Making changes like these can have negative legal and tax consequences if done incorrectly.

Once all changes are made, you’ll need to print the new Operating Agreement and have all of the members sign it.

It is best practice to keep a copy of all versions of your Operating Agreement so you have a history of the changes that were made.

Who Needs Your Operating Agreement?

You may need to provide a copy of your Operating Agreement to:

• A lender if you are obtaining financing

• A title company if you are purchasing real estate

• Accounting and tax professionals for financial assistance

• Lawyers for legal advice

• Potential investors or partners who have an interest in your business

Operating Agreement Protects Your Assets

If you’re involved in a legal battle, the Court will likely ask for your LLC’s Operating Agreement.

Having one can help prove to the Court that you have a legitimate LLC and that you are running your business properly.

If the Courts were to find you running an LLC without an Operating Agreement, they may go after your personal assets.

Where Can I Get an Operating Agreement?

None of the Secretary of States’ Offices provide an LLC Operating Agreement.

However, you can download our free Operating Agreement here:
PDF | Google Doc | Microsoft Word

Here are video instructions.

Hope that helps!

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Matt Horwitz
Founder & Educator at LLC University
Forming an LLC shouldn't be so complicated. Our step-by-step guide will make the process a breeze – and no complex legal jargon! We teach people how to form an LLC for free in all 50 states. We hope you find our free guides and resources helpful in your entrepreneurial journey.
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2 Comments

  1. Pete D. April 2, 2017

    Hello,

    I recently started a Home Improvement Contracting business in Maryland. I registered the business as an LLC and I am currently the single owner/agent. This business was started with the idea of having my son who is 29 years old participate, initially as a sub-contractor (1099) and eventually as a named partner. I also will likely have my wife participating in some capacity (record keeping, etc.), but initially I don’t plan on having employees. I currently have a full time job, but will work this in the evenings and on weekends until I retire sometime over the next 3-5 years. My son has been doing this type of work with other companies and has always been a 1099 sub-contractor. The focus of the business is on storm damage repair of roofing, siding, gutters, etc. The majority of our work will be covered by insurance claims and we will work with the customer and insurance agent to maximize the claim and get the customer what they are entitled to. The actual work to replace the roofing, etc., will be done by our sub-contractors.

    I would like to prepare an Operating Agreement, but I’m not sure how best to describe the working arrrangement. Is what I described above adequate or do you have other suggestions?

    Thank you,
    Pete

    reply
    • Matt Horwitz April 5, 2017

      Hi Pete, thanks for writing in. Unfortunately, this kind of question requires legal advice and we do not provide those services. The inner workings of your business and the day-to-day operations is a “sit down” conversation that might take a little while. Apologies I could not be more specific, but do check out Avvo (https://www.avvo.com/) for local assistance. Hope that helps.

      reply

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