A Limited Liability Company (LLC) comes with a lot of perks but can be confusing to run without proper documentation. Operating agreements serve to contain everything your LLC needs to flourish. This article explains what operating agreements are and an LLC operating agreement template you can use to create one of your own.
What is an LLC Operating Agreement Template?
An LLC operating agreement is a document containing crucial information about how you’ve chosen to structure your business. It serves to provide information on legal, operational, and financial aspects of your company that may come under question in the future.
When issues arise, members can turn to your operating agreement as a baseline for how to react. Each owner should have a hand in its formation and be aware of the rules within.
To finalize the document, creators should sign on the dotted line to make it a legally binding document.
Free LLC Operating Agreement Template
Here’s a single-member LLC operating agreement template that will give you a solid idea of what the document looks like.
Note that this is a generic document for Limited Liability Companies with only one member. Here a single member has full control over the LLC, and no other individuals have a membership.
What Should You Include in Your LLC Operating Agreement?
It can be challenging to capture every possible situation in an operating agreement. Start with the following sections and add things as your company grows.
1. Basic Information About Your Business
Right off the top, you’ll want to record your company’s legal name and any “doing business as” titles you’ve chosen to create. Be sure to capture your business address in the state you registered.
All LLCs require a registered agent, an individual, or a service that accepts legal documents on behalf of your business. Add the name and address of this registered agent to this section of your operating agreement.
This section should also contain your business purpose, a few lines about what you plan to sell, or the services you wish to perform. Don’t make this section too specific, as most successful businesses expand beyond their initial offerings at some point.
Place a statement of intent in your basic information mentioning that your operating agreement conforms to all the LLC laws in your state.
If you include any other basic information when filing your articles of organization with the state, you’ll want to include those here as well.
2. Member Information
After capturing the basics, it’s also wise to list details about each of your initial members. Particulars should include name, address, and job title. Since there’s no requirement to split profits evenly among owners, you’ll also want to list the percentage each one gets.
There’s no limit on the number of members your company can have, and you may wish to add more in the future. Be sure to encompass all the requirements for bringing a new owner on board.
Similarly, you’ll want to have a plan in place should a member decide to leave the company. Lay out guidelines for shifting profits and responsibilities to the other members of the team. It’s also important to document any grounds for expulsion and how to handle such a situation.
3. Capital Contributions
At the time you register your business, there’s a good chance some or all of your members contributed funds, services, or other forms of capital. You’ll want to list these donations in your operating agreement and their cash value.
In the event, your business needs to raise more capital in the future, provide a guideline for who can present funds and any limits. You may also have to stipulate how interest percentages can shift if a member contributes.
4. Business Management
For managing the day-to-day operations of your business, you can elect to take a member-run approach or hire a manager. Make sure your operating agreement specifies which approach your company decides to take.
In a member-run scenario, you’ll want to create a detailed list of job responsibilities for each member, so there’s no confusion or positional overlap. How you divvy up roles is entirely up to you and your team.
Manager-managed LLCs should clearly explain the manager’s responsibilities and which areas they need to seek counsel from the owners. You can also list the salary for such a position and the length of time you expect it to exist.
States don’t require LLCs to hold meetings the way corporations do, but that doesn’t mean you shouldn’t have any. Your LLC operating agreement should specify how often your company will hold meetings, where they will take place, and how many members must attend to have a quorum.
Furthermore, decide all rules around voting to approve an action. You must choose if each member carries an equal vote or base voting shares on ownership percentage. There should be no questions about what’s needed to approve a vote, whether it’s a majority, a unanimous decision, or something altogether different.
In manager-managed LLCs, you’ll want to spell out when members need to vote on manager actions and the areas a manager is free to act on their own.
Operating agreements are fluid documents and will change over time. Use this space to specify how votes will take place to make changes affecting the company as a whole.
Read more about the difference between member-managed vs manager-managed LLCs.
5. Tax Status
LLCs are in a unique position, able to take on the tax status of another type of business entity.
Many business owners choose pass-through taxation, seen in sole proprietorships or partnerships. Here, the government does not tax profits at the corporate level, taxing income only at the individual level.
Others elect to hold a corporate status, following tax guidelines that come with an S-corp or C-corp.
Whatever tax status you choose to start out with, you’ll want to record it here. Since LLCs can change tax structure as needed, you’ll want to document the process for making an adjustment down the line.
6. Dissolving Your LLC
With any LLC, there may come a time when members decide to dissolve the business. Such a process can be a monumental amount of work, but your operating agreement should cover circumstances that would cause your business to end.
Be sure to mention which members will handle each part of the dissolution, from paying off debts to liquidating assets and filling out the necessary paperwork. Once that’s all settled, you’ll want to list what happens to any remaining assets.
7. A Liability Statement
LLCs offer limited liability protection, shielding members from losing personal assets in the event your business can’t cover a debt or a fee. Sole proprietorships and partnerships do not have the same protections, leaving personal responsibility on the table.
An operating agreement is the perfect place to spell out this protection if someone ever challenges this claim.
8. Additional Provisions
At times, other provisions can find their way into an operating agreement. Additional topics often include the death of a member, how to communicate business affairs, and ways to handle disputes among members.
Many businesses use this space to document state laws governing your LLC or any special circumstances specific to your business model.
Does My Business Need an Operating Agreement?
Most states do not require an operating agreement to start an LLC. However, if you file in one of the following locations, you will need to create such a document:
- New York
If you’re starting an LLC in any other state, you’re technically off the hook. However, it’s a smart move to create an operating agreement anyway.
Not having an operating agreement defaults your LLC to the rules and regulations governed by the state. While some of these may pertain to your specific business, many have to be ambiguous to account for a wide range of company types.
This can lead to confusion among members and uncertainty surrounding how to handle business matters. This lax approach could very well lead to disaster down the road.
Your operating agreement is the foundation you and other business owners can turn to when problems arise. It provides a structure for all the crucial components of your business and, since you create it, is something all members agree upon.
Use a reliable service provider like ZenBusiness to create a professional operating agreement for your LLC.
What Is The Purpose Of An Operating Agreement?
Your company stands to benefit in several ways if you use an operating agreement. Here are a few of the top reasons you should create one right away:
As you operate a business, there is always some risk when dealing with products and services. Whether justified or not, customers may have a bad experience with your company and take matters to court.
Operating agreements, especially those with a liability statement, show that LLC owners have taken the time to outline policies, procedures, and protections. Judges tend to look favorably at companies with such documents, upholding the limited-liability nature of the business structure.
In instances without an operating agreement, the court may not feel you have a formal LLC and don’t deserve the protections it affords.
Keep Members on the Same Page
Your entire ownership team needs to sign off on an operating agreement to make it an official document. As a result, every member has to agree on the content within. This includes sensitive areas like ownership percentages and responsibilities within the company.
The operating agreement legally holds each member accountable regarding company guidelines and important company decisions. When push comes to shove, his document explains how to deal with issues and situations where voting could change the course of the company.
Define Key Business Procedures
There’s so much flexibility in how an LLC can function. Areas like tax status and member roles are completely malleable to your company’s needs.
With such a fluid structure, it’s important to document key business procedures that shape the core of your business. An operating agreement is ideal for capturing these critical pieces of information and makes it easy for members to adhere to them.
Avoid Default Laws of the State
Companies choosing not to create an operating agreement must function under the LLC rules dictated by the state they register in. These rules do not take your company’s unique structure into account and instead apply blanket regulations to cover all LLC types.
As long as your operating agreement doesn’t go against your state’s rules, your business has the freedom to choose how to operate. This puts your LLC in a much better place to thrive and can steer you clear of unnecessary gray areas.
How to Create an LLC Operating Agreement Template
It is possible to build your own LLC operating agreement template by following the guidelines in the steps above. Bringing a lawyer in to help with the process can simplify the process but may cost more than a small business can afford.
Smart business owners turn to LLC formation services for drafting an operating agreement that can then be mended as necessary in the future. These services also provide formation tools and can serve as your registered agent.
Our top picks for LLC services that can help you create a professional LLC operating agreement are:
LLC Operating Agreement Template – Frequently Asked Questions
Understanding the ins and outs of an LLC operating agreement template can be a challenge. This FAQ hopes to answer questions about some key aspects of the subject.
Bottom Line on an LLC Operating Agreement Template
Operating agreements become the cornerstone of your LLC, providing guidelines for any and all facets of your business. This single document helps keep members on the same page, explains key business procedures, and can keep personal assets safe. While most states don’t require one, an operating agreement can spell the difference between success and failure.
Generating your own operating agreement is just one of the many tools ZenBusiness provides business owners. The service is completely free in Premium and Pro plans and costs just $125 otherwise.
Sign up today so ZenBusiness can walk you through every step of the LLC operating agreement template creation process.