An LLC operating agreement is a document between the members of a company that records an entity’s ownership, officers, and any other terms its members agree upon. It must be signed by all members and executed when forming a company.
An operating agreement is required in the states of California, Delaware, Maine, Missouri, and New York.
Multi-Member LLC Operating Agreement – For a company with two (2) or more owners.
In the introduction paragraph, the name of the company should be mentioned, including its formation details such as principal office address, registered agent address, purpose, and any other entity details.
The business purpose is to establish the goals, operations, and activities of the company. This can be written in simple terms or by using the NAICS Codes for official classification. This can be helpful if there is a non-compete clause for the other members.
Business Purpose .
This Company’s main business purpose, as recognized officially, is to engage in the lawful business activity that includes the following industry(ies): [ENTER THE BUSINESS PURPOSE]
The Company may also engage in other business activity which is lawful under the laws of [STATE] and any other jurisdiction which it operates.
The ownership interest of each member should be mentioned in an operating agreement. There is no other document that states this information, so it is important to include each member’s name, address, and ownership percentage.
A capital contribution is a cash payment, assets, or other monetary value given to a company in exchange for ownership. The transfer of a capital contribution is complete upon the signing of the operating agreement by all members.
Manager -Managed
A manager-managed LLC has all decisions made by a manager appointed by the owners (members). It is common for larger companies where a board of directors is established with a vote to determine each manager’s powers. A manager does not need to be a member necessarily and is generally compensated by salary or other payment.
Member -Managed
A member-managed LLC has all decisions handled by its owners in accordance with the operating agreement. For a single-member LLC, this is by default, with the sole owner handling responsibilities. In a multi-member LLC, this is usually a majority of the owners that vote to agree on day-to-day operations.
Management .
The management of the Company shall be determined by Members under the following method:
☐ – Member-Managed. All Members shall have equal control and management of the Company with decisions being made on its day-to-day operations by a ☐ majority ☐ unanimous decision.
☐ – Manager-Managed. This Company elects to have its day-to-day operations be under the responsibility of individuals that may or may not have ownership interest (“Managers”). The Managers shall be elected by a ☐ majority ☐ unanimous decision of the Members.
There are certain rights that are elected to each member in relation to their ownership, voting rights, and other matters that may affect the value of the company. This is to be negotiated between the members and written in the operating agreement.
Meetings are not required for an LLC, but it is common for a company to mention in an operating agreement that there are annual meetings. In addition, there should be rules allowing members to call for a meeting if requested.
Meetings .
An annual meeting of the Members is not required but may be held on a day and month of each year by providing at least [#] days’ notice. If a meeting is requested by a Member, it may be held in person or remotely by providing at [#] days’ notice and with at least 50% of the Members’ consent or by at least 50% of the Company ownership. At all meetings where items are put to a vote for Company decisions, the presence of Members holding at least 50% Company ownership shall constitute a quorum for the items to be decided.
Distributions are the payments made to the members in accordance with their ownership interest. If a company is profitable and doesn’t necessarily need excess funds (outside of cash reserves), distributions are commonly paid on a quarterly or annual basis.
Distributions .
Distributions made by the Company to its Members shall be paid in accordance with their respective ownership interest. Payments shall be made each ☐ quarter ☐ year unless otherwise agreed upon by the Members. Distributions may vary over time due depending on the business environment, cash reserves, and reinvestment in the Company.
It is common to include a clause that requires members to offer their interest to current ownership before selling to a third (3rd) party. In addition, some operating agreements can go even further, such that if a member dies, the family is required to sell the ownership interest at fair market value.
For removing members and those that would like to withdraw from the Company, there should be rules set up so that, for example, if the company is being sued and the members are liable, they cannot exit the Company without the consent of the other members.
Mentioning what should happen in the event the business activities end, otherwise known as dissolution. Generally, this occurs if the company is not profitable or the main principal dies. A dissolution may only occur upon the consent of all the members.