LLC Operating Agreement

1. Business Details

Enter the details of the business, such as:

• Name of LLC;
• Principal office address;
• Business purpose;
• Registered agent;
• State of formation; and the
• Date of formation.

2. Member’s Ownership

List each member’s name and their ownership interest. This should be expressed as a percentage (%) or units.

If ownership can change in the future, such as raising money, the terms for such a change must be mentioned.

3. Management (2 ways)

Decide whether the LLC is managed by its members (more common) or a manager. In either case, decide the roles and responsibilities of each individual.

4. Member Contributions

A capital contribution is a member’s initial or subsequent investment into the LLC that may increase their ownership or interest in the entity. Examples include cash, property, or services given to the entity.^[11]

A loan to the LLC is not usually considered a capital contribution.

5. Tax Classification

Enter one of the following tax classifications:^[12]

• Partnership (default) – By default, an LLC will be taxed as a disregarded entity (if one member) or partnership (if two or more members). This means that profits of the LLC “pass-through” to each owner’s personal income based on ownership.
• S-Corporation – Allows the members to be paid salaries as an expense to the LLC, which helps reduce self-employment taxes. To qualify, IRS Form 2553 must be filed within the first 75 days after formation.
• C-Corporation – Allows the entity to offer multiple stock classes for investment and allows for more than 100 shareholders (S-Corporation is limited to 100). However, a C-Corporation is subject to double-taxation of profits (at the corporate level and at the personal level for each owner). To qualify, IRS Form 2553 must be filed within the first 75 days after formation.

6. Decision-Making Process

Decide how business decisions are made by choosing the voting process. Most companies will choose one of the following:

• Majority Vote – When over 50% of the members agree.
• Super-Majority Vote – When a higher threshold of the members must agree, such as two-thirds (66.7%) or three-quarters (75%) of the members.
• Unanimous Vote – All members (100%) must agree.

Also, an LLC can choose to have different decision types depending on the business matter.

7. Meetings & Voting Rights

Depending on the State, an LLC may be required to have at least one meeting per year. An operating agreement should mention how meetings can be requested by members and how votes will be cast (which are recorded in the meeting minutes).

8. Transferring Ownership Interest

Describe the rules for a member’s ability to sell their ownership. For example, it is common to allow other members an option to purchase a member’s interest if a member decides to sell to an outside party.

9. Disputes

Create a process for settling disputes between the members. A popular arrangement requires the parties to negotiate for a specified number of days. If that doesn’t resolve the issue, the parties will go to mediation, arbitration, and litigation (as a last resort).

Disputes often disrupt an ongoing business. Therefore, it’s best to have a process that motivates each party to resolve quickly.