How to Write an LLC Operating Agreement

by Fraser Sherman; Updated September 26, 2017
Multi-ethnic businessmen shaking hands

A limited liability company's operating agreement spells out how a company is run. Putting that agreement in writing ensures all LLC members know the rules, which makes practical sense even in states where the law doesn't require one. Without an agreement, your LLC automatically follows your state laws on how the company should be run. Even a single-member LLC may want to avoid this possible outcome by drafting an agreement. You don't file operating agreements with the state; just keep them with other core records of the business.

Managing the Money

The LLC operating agreement states the percentage of the company you and any other members own. It also covers the policy for distributing profits and losses. You may assume you can draw from your share of profits at any time, but other members may think it's going to be a once-a-year thing. Writing it down settles the question. You should also consider whether you want a guaranteed distribution if there's a profit or if the LLC can reinvest all the profits instead.

Votes and Powers

One member may think it obvious that when making decisions every partner gets one vote. Another member may think it just as obvious that the bigger your investment, the more votes you receive. The Nolo legal website says the operating agreement is where you hammer this out so there are no misunderstandings later. If one member manages the company, the agreement lets you determine when she can make unilateral decisions and when she needs to consult the other members.

Ending the Company

The LLC agreement should cover what happens when one of the members dies or walks away. For example, the agreement can give the other members first right to buy the departing member's interest. This protects you against ending up with a new partner you don't want. The FindLaw website suggests that different situations -- a member death, a member wanting to sell -- may require different policies, each of which should go in the agreement.

State Requirements

An LLC agreement should override any default state rules that you don't want to be bound by. In 2014, for example, California set several new defaults. Under the new rules, managers must obtain unanimous consent from the members before taking any action outside the normal course of business. An LLC must reimburse all members for business expenses, something that used to be optional. If you don't know your state's defaults, you may have unwanted policies imposed on you.

About the Author

A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.

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