How to write an operating agreement
After you form your Limited Liability Company (LLC), you need to write an operating agreement, which will then be approved during the LLC’s initial organizational meeting. An operating agreement is a document that contains the internal rules and regulations that govern how the LLC will operate.
The operating agreement should include in-house matters that affect the way the LLC operates, from the salaries of the officers to how new owners (members) may join the company. Here is how to write an operating agreement for an LLC.
Set up a template for the operating agreement in a word processing package. Use numbered paragraphs for information included within each section. For example, the third paragraph in Section 2 would be numbered 2.3. The first subsection under of paragraph 2.3 would be numbered 2.3.1.
Discuss the formation of the company in Section 1. The first section should discuss basic information about the company, such as the name and purpose of the company. Each item should be given its own paragraph, preceded by the paragraph number.
Outline the management structure. Section 2 should discuss the management of the LLC. Define whether the LLC will be member-managed or manager-managed. List the titles of the officers (typically President, Vice-President, Secretary and Treasurer.) State which actions will require unanimous written consent of all members, such as inviting a new member into the LLC or declaring bankruptcy. State how frequently the members will hold meetings and what the quorum will be.
Explain the roles and responsibilities of the members. For example, members should vote in proportion to their ownership interests in the company, and members should buy in to the company with an initial cash or capital investment.
Cover distribution and tax considerations. Outline the priority of cash distributions and mandate distributions for taxes. How will the distribution of proceeds be handled if the company is dissolved? How will allocations of profits and losses be handled? Also, define the financial year and accounting method to be used.
Specify the term and termination of the company. Identify situations in which the company can be dissolved, such as by unanimous written consent of the members or sale of the company.
Clarify changes in ownership. Outline the process for admitting, transferring, adding, substituting and withdrawal of members. Include any restrictions on these activities.
Include administrative issues that have not yet been covered. For example, in which state will the principal office be located? What company records will be stored at the principal office?
Provide signature lines for each member to sign and print his name.
- The operating agreement needs to be approved at the LLC’s initial organizational meeting. All members will need to sign the operating agreement for the document to go into effect.
- This article provides an overview for writing an operating agreement for an LLC. An operating agreement can be lengthy, so not every detail was covered. You can find templates and samples of operating agreements online, or you can purchase a generic operating agreement from various companies that specialise in incorporating new businesses.