How to Write an LLC Operating Agreement
I am not shy when it comes to emphasizing the importance of an Operating Agreement in an LLC. The Operating Agreement describes the business operations of the LLC and sets forth the agreement of the LLC’s owners (the members) about the management and ownership of the LLC. With a single-member LLC, the Operating Agreement is still essential. The Operating Agreement of a single-member LLC helps to avoid piercing the corporate veil, which is one of the biggest risks of a single-member LLC.
I always recommend that you work with an attorney to form an LLC and draft an Operating Agreement. But, I am well aware that attorneys are not cheap, and that many people resort to doing things themselves in hopes of preserving their limited financial resources. Click here to download our free sample LLC Operating Agreement. So if you are going to attempt to DIY your LLC, here are a few things that should be included in your Operating Agreement:
- Basic Info. This includes the name and location of the LLC, as well as the name and address of the LLC’s registered agent. This also includes the purpose of the LLC and the business operations that the LLC will be involved in.
- Management of the LLC. Is the LLC member-managed or manager-managed?
- Ownership. As a single-member LLC, the single member owns 100% of the LLC. But for LLCs with more than one member, the Operating Agreement should state the percentage ownership of each owner.
- Tax Treatment. Single-member LLCs, by default, are taxed as sole proprietorships. Multi-member LLCs are taxed as partnerships. But LLCs can elect alternative tax treatment such as an S Corporation. The Operating Agreement should address how the LLC will be taxed and if the members have the authority to change that tax status.
- Contributions. Have you contributed money, time, services, or other assets to your LLC? The Operating Agreement should state what contributions have been made and under what circumstances the member(s) can make additional contributions.
- Distributions. I assume you want to make money from your LLC. (If not…maybe you should rethink your plans!) The Operating Agreement should describe how, when, and in what amounts the members will take distributions from the LLC.
- Actions of the LLC. If there is more than one owner, how will decisions be made? Who has a right to vote on decisions of the LLC, and how many votes are required to take certain actions? Do those decisions need to be documented in writing (or does the state require written documentation), or do the members need to hold meetings to discuss certain decisions?
- Meetings. Speaking of meetings, are the members required to attend monthly, quarterly, or yearly member meetings? If you want to require periodic meetings, or if you want to require meetings for certain decisions or situations, those requirements should be stated in the Operating Agreement. In a single-member LLC, you may not want to hold “meetings” with yourself; the Operating Agreement can give you permission to skip the meeting and make decisions in writing in lieu of a formal meeting.
- Liquidation and Dissolution. Your LLC Operating Agreement should address what type of events would result in a dissolution of the LLC, and the steps that would be taken in the process of dissolving and liquidating the LLC.
- Transferring Ownership. This is much more important in a multi-member LLC, but should be included in a single-member LLC Operating Agreement nonetheless. How do members withdraw from the LLC? Can members transfer their ownership to somebody else all willy-nilly, or do they need the permission of the other members first? What about if a member dies? Can members designate who will inherit their ownership in that situation? It is important to put proper limitations and restrictions on how members can transfer their ownership in the LLC.
- Amendments. It may be advisable or necessary to amend or change the Operating Agreement later on down the line. The Operating Agreement should state how it can be amended, what documentation is required for an amendment, and what type of vote is required of the members before any amendments are made.
Download our free sample Operating Agreement for a Colorado single-member LLC. This is definitely not an exhaustive list of what needs to be included in your LLC Operating Agreement. Certain businesses may require additional terms, your state may have requirements for Operating Agreements, and it may be necessary to have additional provisions depending on the members. That is why it is important to not always rely on the one-size-fits-all templates that are floating around on the internet. Your LLC is special and unique, and your Operating Agreement should be too.