When you form an LLC in the United States, there are several documents to keep in mind. However, one of the most overlooked, because it is optional, is the operating agreement.
Below, we explain in detail what an LLC operating agreement is, what it is for and how to put one together. Let's get started!
What is an LLC operating agreement?
An operating agreement is an internal contract that sets out the terms under which an LLC will be run. It is fully customizable according to the LLC's goals and its members' needs.
The operating agreement usually describes the ownership structure, how decisions will be made, how profits are distributed, rules for members joining and leaving, and other additional provisions.
This document is legally valid and, by signing it, its members are legally bound to comply with it. Although it is not mandatory, without an operating agreement the LLC is governed by the default rules of the state where it was formed.
Download the operating agreement template
What are the benefits of having an operating agreement for your LLC?
Having an operating agreement when you form an LLC in the United States offers several benefits for your business:
- It lets you customize how your LLC works, since state law provides a standard operating agreement if you don't have your own.
- It clearly establishes the limited liability of each member, helping avoid possible legal problems. It is recommended even for single-member LLCs.
- It helps prevent misunderstandings and disputes, because how the company operates and makes decisions has been spelled out and accepted by every member.
- It creates business order by setting succession rules and administrative procedures such as meetings and votes.
- The operating agreement is a private document. It doesn't need to be made public, so members keep their privacy.
What should your operating agreement include?
To create a good operating agreement that fully works for your LLC and your business, we recommend including the following sections:
General information
- LLC name: The company's official name as registered.
- Duration of the LLC: Whether the company has a set term or is perpetual.
- Purpose of the LLC: Description of the business or activities the LLC will carry out.
- Principal address: The company's physical address.
Ownership and capital structure
- Members: Names and details of the founding members.
- Ownership percentages: How ownership is split among the members.
- Capital contributions: Details of the members' initial and future contributions.
Management and decision-making
- Management structure: Whether it will be member-managed or manager-managed.
- Rights and responsibilities of members/managers: Specific details about roles and obligations.
- Decision-making process: How important decisions will be made (by majority, unanimity, etc.).
Finances and profit distribution
- Distribution of profits and losses: How and when profits/losses will be distributed.
- Bank accounts: Information about the LLC's bank accounts.
- Financial reports: How often and what kind of financial reports will be produced.
Membership changes
- Adding new members: Process for admitting new members.
- Member exit: Procedures for a member's voluntary or forced withdrawal.
- Transfer of interest: Rules for selling or transferring membership interests in the LLC.
Dissolution
- Conditions for dissolution: When and how the LLC can be dissolved.
- Liquidation process: How assets and liabilities will be handled in a dissolution.
Miscellaneous provisions
- Amendments to the agreement: How changes can be made to the operating agreement.
- Dispute resolution: Procedures for handling conflicts between members.
- Non-compete and confidentiality clauses: If applicable.
- Governing law: Jurisdiction and laws under which the LLC operates.
- Taxation: Whether the LLC chooses to be taxed as a corporation or not.
Signatures
- Members' signatures: All members must sign the document
Is an operating agreement mandatory?
An LLC operating agreement is only mandatory in five states: California, Delaware, Maine, Missouri and New York. In the rest of the country it is optional (although always recommended).
How much does an operating agreement cost?
The cost of an operating agreement depends on how complex each case is, so it can range from a few hundred to several thousand dollars. Requesting a specific quote is usually free.
Is an operating agreement legally binding?
Once signed, an operating agreement is treated as a legally binding document, which means any member can go to court if any of its provisions is breached.
Can the operating agreement be amended?
Yes, an LLC's operating agreement can be amended, as long as the change is recorded in the document itself and signed by all members.
Written by
Ignacio Navarro
Ignacio Navarro is a Certified Public Accountant, founder of Start Companies and a specialist in U.S. companies for entrepreneurs, freelancers and digital businesses in Latin America. With training in international taxation and studies at UCEMA, he advises non-resident clients on forming and maintaining LLCs, opening bank accounts, invoicing, accounting and taxes. His experience combines tax strategy, compliance and practical vision for operating in the U.S. in a simple, organized and professional way.
