Forming an LLC involves many forms, filings, and payments. In the state of Delaware, although it is not required, an operating agreement is always recommended. The operating agreement of an LLC is a set of rules. These rules govern how the LLC is run, and provide both structure and regulation in case conflict arises between members.
What is an Operating Agreement?
An operating agreement of an LLC is different than the Articles of formation which are required. The operating agreement outlines the vision, rules, and provisions of an LLC.
Typically a business will not start off with the intent to argue, but it is possible when you are in a multi-member situation. Having the rules and regulations stated, as well as signed by all members, allows for no question of them.
Operating agreements also aid in keeping the duties of each member apparent. Should there be a disagreement, the operating agreement can help to settle it, in or out of a courtroom.
Why Do You Need an Operating Agreement?
Having an operating agreement can be essential to your LLC. Typically an operating agreement is used in place of state law. This means that rather than be subject to the laws that govern LLCs in Delaware, you can make your own rules. This means that they are often able to prevent disputes between members, by being used to clarify arguments. It can also help to protect the facts of the agreement legally in court, which leads to the protection of the limited liability status of the business.
Information to Include in an Operating Agreement
When drafting your operating agreement make sure you include all of the necessary information and are as detailed as possible.
Here is a list of all the information that should be included in a business' operating agreement.
- Members ownership
- Profit Distributions
- Procedures of transferring interest
How to create an LLC Operating Agreement
If you haven't created an operating agreement before, follow these steps to make sure you have everything you need clearly stated.
Name of LLC
The name of your LLC is essential in an operating agreement. This is to make it clear for which business the agreement is about. It should be clearly placed in case it needs to be used in court.
Information about the articles of organization
The articles of organization are a required document used to form an LLC in the state of Delaware. In order to make connections between the articles of organization and the LLC, this information should be included in the operating agreement.
Duration of the LLC
LLCs can either be created forever or for a conditional period of time. This is known as an indefinite LLC and should be included in the operating agreement.
The operation address of your LLC should be included. It may be the place of business, or a personal business address if you are a single member LLC with an online business.
Name and address of registered agent
Every LLC must have a registered agent. It might be you, or an employee but, regardless, you need to include the address of this person in the state of Delaware.
The purpose of your business might be the goods you sell, services you provide, or that your business acts as a holding company. This should be included in the operating agreement.
Writing an Operating Agreement and How a Lawyer Can Help
Writing an operating agreement might seem complicated. Although it is not incredibly complicated, there are certain things you should include to protect your limited liability status. Having an operating agreement is essential because it can prevent issues in the future.
Your operating agreement will protect each member of the organization, especially if a conflict arises. If you do not wish for your LLC to be governed by state laws, then hiring a lawyer to develop this agreement is a good idea.
Compiling all the formalities of paperwork and including it in this document will ensure that your LLC is protected. Why take the risk, then it is simple to employ a lawyer to take a look at it. Never question the obligations of the members in your LLC, and define each role individually in the eyes of the law.