Overview of the LLC Operating Agreement

What is an Operating Agreement?

An LLC's members must have an Operating Agreement, which outlines the company's operational and financial management procedures.

This agreement also specifies the ownership percentage each member holds in the LLC.

Whether you have one member who owns 100%, two members with a 50/50, 60/40, or 70/30 ownership split, or multiple members with any ownership division you choose, the LLC structure offers flexibility.

There are no limits on the number of members or restrictions on how ownership can be divided.

Internal Document

Unlike your LLC Formation Documents, the Operating Agreement doesn't need to be sent anywhere.

You don’t have to mail it to the state or the IRS.

It's strictly an internal document, meaning you simply keep a copy with your other business records.

Purpose of the Operating Agreement

Choosing the LLC's member(s) and their ownership stakes—also referred to as their "membership interest"—has to be done explicitly in the Operating Agreement.

It also outlines how the LLC will be managed, how taxes will be handled, and how profits and losses will be distributed among the member(s).

Keep in mind that your LLC can be owned by a single person (a Single-Member LLC) or by two or more people (a Multi-Member LLC).

Essentials for Your Operating Agreement

To finalize your Operating Agreement, you'll need the following basic information:

• The formation date of your LLC.
• The name and address of your Registered Office and Registered Agent.
• The LLC's general business purpose.
• Ownership percentages for each member.
• The names and addresses of all members.

Remember, your Operating Agreement isn't permanent—you can update it as necessary.

Updating Your Operating Agreement

One of the key advantages of an LLC is its flexibility in management.

The Operating Agreement is meant to be a flexible document that can be adjusted as your business evolves.

For simple changes, such as updating a member’s address or changing the Registered Office or Registered Agent, you can revise the Operating Agreement directly.

For more complex adjustments—like a member buying out another’s share or seeking investment—it's best to consult an attorney. Incorrectly handling these changes can lead to legal and tax issues.

After making all necessary changes, print the updated Operating Agreement and ensure that all members sign it.

It's a good practice to keep copies of all versions of your Operating Agreement to maintain a record of the changes over time.

Who Needs to See Your Operating Agreement?

It may be necessary for you to give your operating agreement to:

• Lenders in order to obtain funding
• Title firms for the purchase of real estate
• Accountants and tax consultants for monetary support
• For legal advice, consult attorneys
• Possible financial backers or business associates

How the Operating Agreement Protects Your Assets

The Operating Agreement for your LLC may be requested by the court if you are embroiled in a legal issue.

This document can help establish that your LLC is properly organized and that you are managing your business correctly.