A Limited Liability Company, popularly known as an LLC, is a type of U.S. business entity that is easy to form and simple to manage. Since an LLC is a hybrid of a partnership and corporation, it provides the twin benefit of pass-through taxation with limited liability. To take full advantage of having an LLC, you should go one step further and write an Operating Agreement during the startup process. Many tend to overlook this crucial document since it is not a mandatory requirement in many states. Only a few states specify the need of putting an operating agreement in place (California, Delaware, Maine, Missouri, New York). But be sure this is what you want before proceeding.

The Operating Agreement is a document which spells out the terms of a Limited Liability Company (LLC) according to the members. It sets forth the path for the business to follow and brings in more clarity in operations and management.

Case For Inclusion

  • Default Rules

In the U.S., the LLC formed in a certain state is recognized by all U.S. states, but it operates according to the rules and regulations of that state. These rules are meant for all LLCs in general, and may or not cater to the specific requirements of a particular business. To overcome this problem, the members can opt to have an Operating Agreement in place. For example, an LLC by the default rules in many states ceases to exist when one member (owner) departs. The rest of the members are left with a choice to part ways or start all over again. This can be bad for a well-established business and its members. This situation can be avoided if suitable provisions are included in the Operating Agreement of the LLC.

  • Customized Structure

Members with the help of an Operating Agreement can customize the financial, managerial and operational structure of the business. For example, in a two-member LLC, "Jim" has contributed 30% and does 70% of the work, while "Tim" does just 30% of the work and has contributed 70%. The two can agree to split profits in a proportion they like (say 50% each) by including it in the Operating Agreement. Or say, if Tim and Jim plan to add another member in the future, the rules and procedures can be set and included in the agreement.

  • Avoid Misunderstandings

Business shouldn’t be run on verbal agreements. In the present circumstances, members may decide and agree to do things in a certain way but there can be conflicts about the same issue at a later date with change in circumstances or say the view of a member changes. By adding the terms decided in written form, there is no room for ambiguity as the document can be referred to in times of such conflicts in the future.

  • Liability Protection

The use of an Operating Agreement helps to distinguish the status of a single-member LLC from that of a sole proprietorship or partnership. In its absence, there could be a case of mistaken identity. The court honors and recognizes the agreement and thus helps to shield the personal liability of LLC members.

The Skeleton

While every Operating Agreement is different, it serves the basic purpose of laying out the parameters according to which a business will function. Different states have their own set of regulations with regards to this document. It should be drafted according to the needs of the respective states and there should be no contravention of rules. For example in New York, it is a compulsory document and it has to be adopted before, at the time of, or within 90 days after the Articles of Organization are filed.

While you can prepare an LLC Operating Agreement yourself using online and other resources, it is advisable to consult an attorney for reviewing it. This is to make sure that no important point is left out, to have the suitable inclusions especially if any state default rule doesn’t concur with your business and also to make sure that it complies with the state laws in general. Below is an Operating Agreement in skeleton form, it shows the basic aspects to be included.

Operating Agreement Of (Company), LLC

A (State) Limited Liability Company

Table of Contents

​ARTICLE I - Company Formation

1.1 Formation and Effective Date of Agreement . . . . . . . . . . . . . .1 

1.2 Name . . . . . . . . . . . . . .1 

1.3 Principle Place of Business  . . . . . . . 1 

1.4 Registered Agent. . . . . . . . . . . . . . . . 2 

1.5 Purpose & Business . . . . . . . . . . . . .2

1.6 Term . . . . . . . . . . 2                                                                               

ARTICLE II - Membership . . . . . . . . . . .3 

2.1 Initial Members . . . . . . . . . . . . . 3 

2.2 LLC Shares . . . . . . . . . . . . . . . 3

2.3 Additional Members . . . . . . . . . . . . 3 

2.4 Withdrawal or Resignation of a Member . . . . . . . . . . . . . . . 4 

2.5 Dissociation of a Member . . . . . . . . . . . . . . . . . . . . . 4 

ARTICLE III - Capital Contributions . . . . . . . . . . . . . . . . . . . . 4 

3.1 Initial Contributions . . . . . . . . . . . . . . . . . . . . . . . 4 

3.2 Additional Contributions . . . . . . . . . . . . . . . . . . . . . . . . 5 

3.3 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 

ARTICLE IV - Management & Restrictions . . . . . . . . . . . . . . 5 

4.1 Management of Business . . . . . . . . . . . . . . . . . . 5 

4.2 Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

4.3 Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . 6 

4.4 Power of Mangers . . . . . . . . . . . . . . . . . . . . . . . . . . 6

4.5 Compensation of Members . . . . . . . . . . . . . . . . . . . . . 6 

4.6 Amendment of Articles or Agreement . . . . . . . . . . . . . . . . 7 

4.7 Representatives of Members . . . . . . . . . . . . . . . . . . . . . . 7 

ARTICLE V - Accounting & Records . . . . . . . . . . . . . . . . . . . . . 7 

5.1 Tax & Financial Reporting . . . . . . . . . . . . . . . . . . . . 7

5.2 Inspection & Supervision of Books . . . . . . . . . . . . . . . . . . 8 

5.3 Annual Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

5.4 Tax Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

ARTICLE VI - Allocations . . . . . . . . . . . . . . . . . . . . . . . . . . 9

6.1 Profit & Loss. . . . . . . . . . . . . . . 9 

6.2 Distributions . . . . . . . . . . . . . . . . . . . . . . . 9 

ARTICLE VII – Transfer of Membership . . . . . . . . . . . . . . . . . . . . . 10 

7.1 General Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . 10

7.2 Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10                                                                                                                     

7.3 Transfer Void . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 

7.4 Enforceability  . . . . . . . . . . . . . . . . . . . . . . . . 11 

ARTICLE VIII – Indemnification  . . . . . . . . . . . 12 

8.1 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . 12 

8.2 Limitation of Liability . . . . . . . . . . . . . . . . . . . . . . 12 

ARTICLE IX – Buyout . . . . . . . . . . . . . . . . . . . . . . . . . . 13 

9.1 Buyout . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

ARTICLE X - Termination. . . . . . . . . . . . . . . . . . . . . . . . . . 13

10.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

10.2 Authority to Wind Up . . . . . . . . . . . . . . . . . . . . . . . . 14 

10.3 Winding Up and Certificate of Cancelation . . . . . . . . . . . . . 14 

10.4 Distribution of Assets . . . . . . . . . . . . . . . . . . . . . . . 14 

ARTICLE XI – Miscellaneous Provisions . . . . . . . . . . . . . . . . 15 

11.1 Books . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

11.2 Amendments . . . . . . . . . . . . . . . . . . . . . . . . 15 

11.3 Power of Attorney  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 

11.4 Notices. . . . . . . . . . . . . . . . . . . . . . . . 16 

11.5 Further Assurances. . . . . . . . . . . . . . . . . . . . . . . . . . 16 

11.6 Binding Effect. . . . . . . . . . . . . . . . . . . . . . . . . . 17 

11.7 Applicable Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

11.8 Effective Date . . . . . . . . . . . . . . . . . . . . . . . . . . 17 

11.9 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Counterpart Signature Page to Operating Agreement . . . . . . 18

Exhibit A: Capital Contribution . . . . . . . . . . . . . . . . . . . . .  . 19

Exhibit B: Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Exhibit C: Tax Allocations . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Execution Page . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Bottom Line

Just as “One size doesn’t fit all,” the state default LLC rules don’t suit all. The best way to counter this problem is by writing an Operating Agreement, which gives freedom, protection and control to your business. Though it's best to include an Operating Agreement in the initial stages, if you have missed on that, it’s never too late to put it in place provided all members agree to it. The document can also be modified at a later stage with the guidance and help of an attorney.