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Operating Agreement & Drafting Guide

A custom-tailored LLC operating agreement—
the single most important document of your LLC

Once your LLC is organized, and you’ve received the file-stamped copy of your charter document from the state, your next task is to draft your operating agreement.

An LLC operating agreement functions like a corporation’s bylaws. As such, the operating agreement delineates the operational, procedural, and structural framework of your company, i.e., the business of the LLC and the conduct of its affairs.

It defines the relationships, responsibilities, and rights of its members, managers, and assignees. It establishes each member's ownership percentages, distributive share of profits and losses, and obligations to contribute capital. It also addresses what happens when a member resigns, dies, becomes incapacitated, goes bankrupt, or is subject to a charging order. It also describes and defines the rights, authority, obligations, and duties of the managers.


You Must Have a Written Operating Agreement
Even if the State Doesn't Require One

While many states do not mandate that your LLC have a written operating agreement, it's reckless to operate your LLC without one. And this rule applies even if you're the only member of your company.


The reasons have everything to do with why you set up your LLC in the first place and the very essence of your LLC as a legally distinct entity.

The reasons you formed your LLC included personal asset protection, tax minimization, and credibility enhancement.

These benefits derive from the fact that the LLC is a distinct entity. As such, an LLC is and remains autonomous, significant, and secure provided that it is treated as such.

A properly drafted customized operating agreement will help protect your limited liability status, circumvent financial and management misunderstandings, and make certain that your business is run by your rules, not the state’s default rules.


An operating agreement
protects your limited liability status

The main reason to draft a written operating agreement is to help ensure that a court or the IRS will respect your limited personal liability. This is of particular importance in a single-member LLC where, absent a written operating agreement, the LLC will look more like a sole proprietorship rather than a legally distinct business entity. A customized written operating agreement lends credibility to the separate existence of your LLC.


An operating agreement
defines company structural policies and procedures

Multiple-member LLCs must document how they will share profits, make management decisions, handle changes in membership, and operate the company in general. An operating agreement ensures that each member understands the finances, management, and operational procedures of the company.


An operating agreement
overrides the default rules of the state

What’s most important is that an operating agreement enables you to avoid the default rules imposed by the state. Every state has laws that set out default rules for operating an LLC in that state that apply in the absence of a written operating agreement that provides otherwise.

For example, the default rules dictate how LLC profits and losses will be allocated regardless of a member’s investment in the business. If the members did not invest equal amounts in the LLC you likely don't want profits and losses to be allocated equally. The remedy: the operating agreement can spell out how profits and losses will be allocated.

When you have a written operating agreement, customized to your needs and requirements, you can choose the rules that will govern your LLC, rather than having to follow the state’s default rules that aren’t the best for your LLC.


An operating agreement
should address the following

There are specific issues your operating agreement should address, many of which will be governed by your unique situation and needs provided that the provisions are consistent with the intent of the founding members, do not contradict the charter document, and are in accordance with the state code.

At a minimum, an operating agreement should address the following:

  • Definitions—a list of clearly defined terms relevant to the operation of the LLC
  • Offices—the address of both the registered agent and the principal place of business
  • Business purpose—the broadly defined purpose of the company
  • LLC management—whether the company will be member-managed or manager-managed
  • Members—the name and address of each member, their initial capital contribution, and ownership interest
  • Member rights, responsibilities, and restrictions—voting rights (percentage or per capita), obligation to contribute additional capital, restrictions on withdrawal, non-compete restrictions, member expulsion and redemption including how a member’s ownership interest will be valued and redeemed, fiduciary obligations
  • Managers and officers—the name and address of each manager and officer, provisions for their election, appointment, and removal, and their authority and duties
  • Indemnification of members and managers—
  • Meetings—whether required, how to call, notice requirements
  • Transferability of ownership interests—restrictions on transferability, buy-sell terms and conditions, first right of refusal
  • Issuing new member interests—who can issue ownership interests, votes required, preemptive rights of existing members to maintain ownership position
  • Dissolution, termination, and merger—when and how LLC is dissolved, wound down, and liquidated, provisions for continued existence
  • Governing law and venue—forum selection clause to determine governing law and venue, alternative dispute resolution options
  • Miscellaneous provisions—amendment procedures, integration or merger clause, assignability of rights, capital accounts, tax election, tax year


Your operating agreement—
the bottom line

Each state’s LLC statutes have been written to afford you as much flexibility and latitude as feasible when drafting your particular operating agreement. As such, the statutes minimize the number of mandatory provisions and maximize the number of default provisions that prevail only in the event you fail to create an operating agreement of your own.

The state has given you license to run your business in the manner that’s best suited to your unique needs, desires, and circumstances. To not avail yourself of this privilege, and all the benefits that would obtain, is foolhardy.

With a properly contemplated, well-drafted operating agreement, tailored to you and your business, you can be confident that your desires are respected by a court and the IRS and avoid the default rules of the state.

With that said, you have three options:

First: You can download one of our free templates and take the time to fill in the blanks. This is the very least you should do, the bare minimum.

Second: You can listen to the video at the top of this page and signup for the training you need to customize your operating agreement to your unique situation. This is the best option if you can spare the time to handle everything yourself.

Third: You can let us do the work for you. After a brief consultation, we’ll draft your operating agreement for you, making certain that it is custom-tailored to your unique situation and specific business needs.

And at only $127 it’s an incredible value as well.


Draft It For Me


So what’ll it be?