A limited liability company (LLC) is one of the most common legal structures for a small business or startup. But each LLC functions differently. Drafting an LLC operating agreement is one of the primary ways that founders define how their particular company will operate.
What is an operating agreement for an LLC?
An LLC operating agreement is a foundational legal document that outlines the ownership and corporate governance of a limited liability company. Drafting an operating agreement is often one of the first steps for an LLC’s members once they form the business entity and file a certificate of formation or articles of organization (depending on the state).
The operating agreement typically defines an LLC’s purpose, its operating procedures, its ownership structure, the distribution of any profits or losses, and many other key details, such as what happens in a change of LLC ownership. Most companies consult with legal and financial advisers who are familiar with specific state laws before drafting and finalizing their operating agreement.
Who needs an operating agreement?
Every LLC that is registered in the states of California, Delaware, Maine, Missouri, and New York is legally required to have an operating agreement.
While an operating agreement is not a requirement in the rest of the U.S., most LLCs in other states still choose to have an agreement in place, particularly if the LLC has multiple owners (a multi-member LLC). However, even single-member LLCs can benefit from having an operating agreement or other similar internal document.
The operating agreement can set ground rules to prevent or solve any disputes among the LLC owners, aid in decision-making, and assist generally in day-to-day operations. If an LLC does not have an operating agreement in place, it will be subject to the state’s default rules where it was formed.
What is included in an LLC operating agreement?
While LLC operating agreements can be highly customizable depending on the company, most cover many of the same key elements. These include:
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Basic company information: Give the legal name of the LLC, a description of its purpose and activities, its principal place of business and registered agent.
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Members details: List the names and addresses of all members of the LLC. Note that you’ll need to update these details anytime a new member is added to your LLC.
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Ownership structure: List the ownership percentages and types of membership interest units held by each LLC member.
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Management rules: Outline the LLC’s management structure. Some LLCs are managed in collaboration by the members, while others appoint a separate manager.
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Capital contributions: Specify the initial member contributions to the LLC. These contributions could include a financial investment, property, or professional expertise and services.
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Allocation of profits and losses: Describe how any profits, losses, or other distributions will be shared among the members.
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Voting rights and procedures: Detail how members will vote to implement any potential changes to the LLC in the future.
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Transfer of LLC ownership: Establish the ground rules under which a full or partial transfer of LLC ownership might occur in the event of a sale, the dissolution of the LLC, or any other events that might impact ownership.
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Accounting information: Address how the LLC will maintain its financial records for tax purposes and bookkeeping for the IRS.
How to create an operating agreement for an LLC
Although online LLC operating agreement templates may exist, we recommend working with a law firm that specializes in LLC operating agreements so you can create documents to fit your LLC’s specific needs.
How to change or update an LLC operating agreement
The process for changing or updating an LLC’s operating agreement may depend in part on some of the protocols outlined in the original operating agreement and state law. In most cases, however, implementing changes will follow a similar process.
Voting on the changes
While the details of the voting process may differ, in most cases, any changes to an LLC’s operating agreement will be put up to a vote among the business owners. If an LLC is managed by a manager who is not one of the members, the manager may have a vote, too.
Writing the amendment
If the LLC members vote to change their existing operating agreement, they then must draft and sign a written amendment to be added on to the existing document. Many companies may consult with legal counsel before drafting an amendment.
Communicate the changes
LLC members should make sure that any fellow members, managers, or other key stakeholders are aware of any changes to the operating agreement once they are implemented.
Do I need to file my LLC operating agreement?
No state requires an LLC to file its operating agreement with the state government. The five states that do require LLCs to have an operating agreement—California, Delaware, Maine, Missouri, and New York—only require that LLCs keep a copy in their own records.
How Carta helps LLCs
Carta LLC provides centralized reporting, sophisticated modeling capabilities, and efficient cap table management, empowering you to navigate complex financial landscapes with ease. Simplify cap table management and gain valuable insights into transactions through customizable reports tailored to your needs.
Beyond cap table management, Carta offers LLCs a diverse range of products including Waterfall modeling, Carta 409A valuations, and document sharing to streamline K-1 form assistance. Additionally, leverage features such as 718 expense for PIUs and historical distributions, ensuring your company remains compliant and informed every step of the way.
