Operating Agreement

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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.

24 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
  2. Samantha December 31, 2017

    Hi Matt- I am so happy I have found your site. I am the mom of a now, 22 yr. old actor. We used to have a CA corp. which I started for my son as a loan-out when he was a minor then shifted all to him (all officers and sole shareholder) when he turned 18 but I still ran the business and it was my signature and credit that got our banking/ credit cards etc. Two yrs. ago, due to little income, we dissolved the corp. NOW- he is starting an LLC but as his business manager I am the one doing all the books, staring LLC etc. I am just REALLY confused about member/manager. we want this to be a single member (him) and I do not want to be financially involved or a member at all but I will still be the ONE running all business matters. Do I need to be a “manager” or can we just spell this out in OA? I already have Power of Attorney for ALL of his business affairs. Thank you SO much for your great, clear info!

    reply
    • Matt Horwitz December 31, 2017

      Hi Samantha, thank you for the kind words. And I’m glad that our website has been so helpful. Before getting into the Manager-managed vs. Member-managed topic, let me just add a note regarding being the LLC Organizer and keep your documentation in order. Because you are the one forming the LLC for your son, you will be the LLC’s Organizer and will sign the California Articles of Organization. Your son’s name will not be listed on the Articles of Organization, since California does not ask for the Member’s information on this form. So after you sign as Organizer and the LLC is approved, you can then sign a Statement of LLC Organizer in Lieu of Organization Meeting, stepping down as the LLC Organizer and appointing your son as the Member. Also, your son should sign an LLC Operating Agreement. As far as Manager-managed vs. Member-managed, I think you could go either way. You could elect to have the LLC be Manager-managed on the Articles of Organization. Then sign a Manager-managed Operating Agreement where your son appoints you as Manager. After that, you are the only one who has authority to bind the LLC into contracts and agreements. Said another way, you’ll be the only one who can act on behalf of the LLC. Your son, being the Member though, has the power to remove you as Manager, since he’s the only Member (and doesn’t need the consent of any other Members, since there aren’t any). I think an easier option though, is just form a Member-managed LLC where you son is known as the Managing Member. He has full authority and the right to bind the LLC into contracts and agreement. However, you can simply be a “consultant” or independent contractor and you do as you already are doing. Overseeing and managing until your son has enough experience and maturity to take things over himself. You could have an agreement like this in place verbally, but it’s better to spell it out in writing. And you could add that language to the LLC’s Operating Agreement. Hope that helps offer some more clarity.

      reply
      • Samantha January 1, 2018

        Thanks again Matt!

        I had to read your info over a few times but I think I get it. already sent in the Articles of Org. as organizer so if I like it or not, we are off and running. Will relinquish and follow-through as you suggest .

        HAPPY NEW YEAR!

        reply
        • Matt Horwitz January 1, 2018

          A lot of this stuff requires reading it a few times lol ;) Glad to hear you got everything going. Thank you and Happy 2018!!

          reply
  3. Stephen Bradford February 7, 2018

    Do you have an example of a Membership Certificate?

    reply
    • Matt Horwitz February 9, 2018

      Hi Stephen, we don’t have LLC Membership Certificates available yet, but we will soon. I just emailed you a couple examples. Hope that helps.

      reply
  4. Antony Brooks February 24, 2018

    Hello I’m forming, my LLC by myself is more than 120 day already to publish an add in the news paper, do you think i can still do it? I don’t know if the state will acept it,

    reply
    • Matt Horwitz February 25, 2018

      Hi Antony, yes, you can still do it. It’s never too late. Essentially your New York LLC is “not in compliance”. Once you meet the New York LLC publication requirements, your LLC will then be compliant. Hope that helps.

      reply
  5. Scotty March 19, 2018

    Your website is fantastic and very informative. I’m planning to create a FL LLC and it has helped me understand the details and trade-offs. Do you have a template for a Manager-Managed LLC Operating Agreement? If not, what should I be thinking about changing in the Member-Managed Operating Agreement?
    Thank you,
    Scotty

    reply
    • Matt Horwitz March 19, 2018

      Hey Scotty, thanks for the kind words! I just emailed you the Manager-Managed Operating Agreement. Hope that helps :)

      reply
      • Jeremy Ferchau August 9, 2018

        Can I get the Manager-managed version as well? I’ll own 75% of the LLC with 2 other members splitting the other 25%. But I will be appointed as the sole, internal manager. Thanks

        reply
        • Matt Horwitz August 15, 2018

          Hey Jeremy, I just emailed it over to you. Hope that helps.

          reply
          • Will do August 30, 2018

            Hey matt,

            Your website has been super helpful. Have learned a lot (like that I might as well form in California if I am going to do business there). Sorry to bother, but could I get a copy of the managed member operating agreement as well.

            Thanks so much. Really appreciate it.

            reply
            • Matt Horwitz October 12, 2018

              Hey Will! Thanks so much! Glad to hear we could help. Check out our updated California LLC Operating Agreement page. We now have Member-managed and Manager-managed Operating Agreement templates for download. Hope that helps.

              reply
  6. Yadira Covarrubias March 28, 2018

    (last post wasn’t meant to be posted)

    Hello Matt,

    My father recently started a furniture Installation Crew LLC business in California. He is currently the single owner/ agent. I will be foreseeing all paperwork that needs to be filed and also take responsibility over hiring/payroll/and obtaining work projects from different offices etc. At the moment he only wants 3-4 employees. He currently has a full time job and will be dedicating part-time to his llc.

    I would like to get some direction in regards to completing this Operational Agreement. What’s the best way to figure out how to put everything in place?

    Thank you,

    Yadira

    reply
    • Matt Horwitz March 29, 2018

      (we removed the last post for you)

      Hi Yadira, are you saying that you want to be listed in the Operating Agreement? Or that you’re just not sure how to complete it for your father? An LLC Operating Agreement is an agreement among the Members, so since your father is the only Member, he’ll be the only person signing the Operating Agreement. You and he don’t need your working agreement spelled out in this document. Will you be getting paid for your work and working for him as an independent contractor? If so, a different independent contractor agreement would work.

      reply
  7. Scott Thomas April 23, 2018

    Hi Matt,
    Thank you for what you are doing.
    My question is: do you provide guidance for domesticating an LLC from Delaware to Florida?

    reply
    • Matt Horwitz April 29, 2018

      You’re welcome Scott. At this point, we don’t have content written on domestication. It’s on our list, just not the top priority at this time. However, for domesticating a DE LLC into a FL LLC, you’ll file Articles of Conversion For “Other Business Entity” into Florida Limited Liability Company. The form includes the conversion as well as the Florida Articles of Organization. This can only be filed by mail. No online filing for this at this time. Approval time is currently 7 to 10 business days. After domestication is approved, you can dissolve Delaware LLC and wind up its affairs. Hope that helps.

      reply
      • Scott Thomas April 30, 2018

        Hi Matt,
        Thank you for that information. But when I called the State of Florida to confirm, they told me to file Article of Conversion and Article of Organization and no Delaware Certificate of Status is required. They said that Domestication is only requierd if the LLC is from out of the country.
        I wonder if this make sense to you?

        reply
        • Matt Horwitz April 30, 2018

          Hi Scott, my first reply was incorrect. I’ve since edited it to help future readers. You were told correct. No Delaware Certificate of Status is needed and the correct form is called the “Articles of Conversion For ‘Other Business Entity’ into Florida Limited Liability Company”. Thanks for helping us square things up :)

          reply
  8. Jacqueline June 19, 2018

    Hi Matt,

    I’m in the process of selling my business (owned for 35) and the title company is requesting a Operating Agreement for our LLC. This is something we’ve never had on file. Is this something we can generate now to submit for closing purposes?

    Thank you,

    Jacqueline

    reply
    • Matt Horwitz June 19, 2018

      Hi Jacqueline, yes, you certainly can. Just back date the Operating Agreement to whenever you’d like. Hope that helps.

      reply

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