LLC Operating Agreement
LLC Operating Agreement Generator
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Sample LLC Operating Agreement Generated by Legal Tank
LLC Operating Agreement
Formation and Name
The Members hereby form a limited liability company (the "Company") pursuant to the provisions of the Limited Liability Company Act of the State of _____________ (the "Act"). The name of the Company shall be _________________________, LLC, and all business of the Company shall be conducted under such name or such other names as the Members may designate from time to time in compliance with applicable law.
The Members shall cause to be filed all certificates and documents, and shall take all such other actions, as may be required or advisable under the Act and the laws of any jurisdiction in which the Company conducts business to establish, maintain, and protect the Company as a limited liability company.
Purpose and Powers
The purpose of the Company is to engage in any lawful business activity for which a limited liability company may be organized under the Act. The Company shall possess and may exercise all powers and privileges granted by the Act, by any other applicable law, or by this Agreement, together with any powers incidental thereto, so far as such powers are necessary or convenient to the conduct, promotion, or attainment of the purposes of the Company.
The Company shall have the power to own, hold, and dispose of real and personal property; to borrow money and issue evidences of indebtedness; to enter into contracts; to sue and be sued; and to do all things necessary, convenient, or incidental to its purposes as set forth herein.
Principal Office and Registered Agent
The principal office of the Company shall be located at such place as the Members may from time to time designate. The registered agent and registered office of the Company shall be as set forth in the Articles of Organization filed with the Secretary of State, and may be changed from time to time by the Manager or Members in accordance with the Act.
Members and Membership Interests
The names, addresses, and percentage interests of the Members are set forth in Exhibit A attached hereto and incorporated by reference. Each Member’s percentage interest represents such Member’s share of profits, losses, distributions, and voting rights unless otherwise specified in this Agreement.
No Member shall have any interest in the specific property of the Company. A Member’s interest in the Company constitutes personal property and shall be subject to the terms and conditions of this Agreement. No Member shall have priority over any other Member with respect to distributions, allocations, or return of capital, except as otherwise provided herein.
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Capital Contributions
Each Member shall contribute to the capital of the Company the amount set forth opposite such Member’s name in Exhibit A. Capital contributions may be made in cash, property, services, promissory notes, or other obligations to contribute cash or property, as agreed by the Members. The fair market value of non-cash contributions shall be determined by mutual agreement of the Members.
No Member shall be required to make any additional capital contribution beyond the initial contribution without the unanimous written consent of all Members. No Member shall be entitled to interest on any capital contribution or to withdraw or demand the return of any capital contribution, except as expressly provided in this Agreement.
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Allocations and Distributions
The net profits and net losses of the Company for each fiscal year shall be allocated among the Members in proportion to their respective percentage interests, unless otherwise required by the Internal Revenue Code or applicable Treasury Regulations. Items of income, gain, loss, deduction, and credit shall be allocated consistently with the allocation of profits and losses.
Distributions of available cash shall be made at such times and in such amounts as the Members shall determine, in proportion to the Members’ respective percentage interests. Notwithstanding the foregoing, no distribution shall be made if such distribution would violate the Act or render the Company unable to pay its debts as they become due in the ordinary course of business.
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Management and Voting
The Company shall be managed by its Members in proportion to their percentage interests, unless the Members designate one or more Managers as set forth in Exhibit B. Each Member or Manager shall have the authority to bind the Company in the ordinary course of business. Actions outside the ordinary course shall require the approval of Members holding a majority of the percentage interests.
The following actions shall require the unanimous written consent of all Members: (a) sale or disposition of all or substantially all Company assets; (b) merger or consolidation with another entity; (c) amendment of this Agreement; (d) admission of new Members; (e) filing for bankruptcy or assignment for the benefit of creditors; and (f) any transaction between the Company and a Member or affiliate thereof.
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Transfer of Membership Interests
No Member shall sell, assign, transfer, pledge, hypothecate, or otherwise dispose of all or any portion of such Member’s interest in the Company without the prior written consent of Members holding at least a majority of the remaining percentage interests. Any purported transfer in violation of this provision shall be null and void and of no force or effect.
In the event a Member desires to transfer all or any portion of such Member’s interest, the remaining Members shall have a right of first refusal to purchase the interest on the same terms and conditions offered by the prospective transferee. The remaining Members shall have thirty (30) days from receipt of written notice to exercise such right, and the purchase price shall be paid within sixty (60) days of exercise.
Dissolution and Winding Up
The Company shall be dissolved upon the occurrence of any of the following events: (a) the unanimous written consent of all Members; (b) the entry of a decree of judicial dissolution under the Act; (c) the occurrence of any event that makes it unlawful for the Company to continue its business; or (d) any other event specified in this Agreement as causing dissolution.
Upon dissolution, the Company’s affairs shall be wound up, and its assets shall be distributed in the following order of priority: (a) payment of debts and liabilities to creditors, including Members who are creditors; (b) establishment of reserves for contingent liabilities; (c) return of capital contributions to Members; and (d) distribution of the balance to Members in proportion to their percentage interests.
Indemnification
The Company shall indemnify, defend, and hold harmless each Member, Manager, officer, employee, and agent of the Company from and against any and all claims, demands, losses, damages, liabilities, costs, and expenses (including reasonable attorneys’ fees) arising out of or in connection with the management or conduct of the Company’s business, except to the extent attributable to such person’s gross negligence, willful misconduct, or knowing violation of law.
No Member or Manager shall be personally liable for the debts, obligations, or liabilities of the Company solely by reason of being a Member or Manager. The liability of each Member shall be limited to the amount of such Member’s capital contribution and share of undistributed profits, as provided under the Act.
General Provisions
This Agreement constitutes the entire agreement among the Members with respect to the subject matter hereof and supersedes all prior agreements and understandings, whether oral or written. This Agreement may be amended only by a written instrument signed by all Members.
This Agreement shall be governed by and construed in accordance with the laws of the State of _____________, without regard to its conflicts of law principles. If any provision of this Agreement is held to be invalid or unenforceable, the remaining provisions shall continue in full force and effect.
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What Is a LLC Operating Agreement?
An LLC operating agreement is an internal governance document that establishes the ownership structure, management framework, financial arrangements, and operational procedures of a limited liability company. While the articles of organization filed with the state create the LLC as a legal entity, the operating agreement serves as the governing rulebook that defines the relationships among members, defines their rights and obligations, and provides mechanisms for resolving disputes, admitting new members, and dissolving the company. The U.S. Small Business Administration's guide to LLC formation outlines the foundational steps for establishing an LLC, including the role of the operating agreement in defining internal governance. This document is the foundational contract upon which all internal LLC operations are built, and it should be complemented by non-disclosure agreements to protect the company's confidential business information.
The operating agreement defines whether the LLC will be member-managed, where all members participate in daily operations and decision-making, or manager-managed, where one or more designated managers - who may or may not be members - handle day-to-day business while the remaining members serve as passive investors. This distinction has significant implications for authority to bind the company, fiduciary duties, and liability exposure. The agreement also specifies voting rights, quorum requirements, and the threshold needed for ordinary decisions versus major actions such as selling company assets or admitting new members.
Financial provisions in the operating agreement address each member's initial capital contribution, ownership percentage, profit and loss allocation, distribution schedule, and additional capital call procedures. These provisions are critical because they override the default state rules, which typically allocate profits and losses equally among members regardless of their capital contributions. Without an operating agreement, members may find themselves subject to statutory default provisions that do not reflect their actual business arrangement, leading to disputes and potential litigation.
For a quick overview of what a standard operating agreement looks like, review our Download a llc operating agreement. Perhaps most importantly, the operating agreement is the primary mechanism for preserving the limited liability protection that is the central benefit of the LLC structure. Courts have pierced the corporate veil of LLCs that operate without an operating agreement, treating the entity as an alter ego of its members and imposing personal liability for business debts. Maintaining a written operating agreement, along with separate bank accounts, proper record-keeping, and adequate capitalization, demonstrates that the LLC is a legitimate business entity deserving of liability protection.
Why You Need a LLC Operating Agreement
You are forming a single-member LLC and need to establish the separation between your personal finances and the business entity to prevent courts from piercing the corporate veil and holding you personally liable for business obligations. Our LLC operating agreement drafting service ensures your document satisfies your state's statutory requirements and provides maximum liability protection.
Multiple co-founders are starting a business together and need to formalize their respective ownership percentages, capital contributions, management roles, profit-sharing arrangements, and exit procedures before disagreements arise. You will also need independent contractor agreements and service agreements as the business begins engaging vendors and freelancers.
Your LLC is seeking bank financing, a business line of credit, or outside investment, and the financial institution or investor requires a copy of the operating agreement to verify the management structure and the authority of the person signing on behalf of the company.
A member wants to leave the LLC, and you need clear buy-sell provisions that establish a fair valuation method and payment terms rather than relying on costly negotiations or litigation to determine the departing member's buyout price.
Your state requires an operating agreement by statute - New York, California, Delaware, Maine, and Missouri are among the states that legally mandate LLCs to adopt a written operating agreement.
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LLC Operating Agreement is often used alongside other business formation documents. Depending on your situation, you may also need:
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Key Sections in a LLC Operating Agreement
Formation and Purpose
This section identifies the LLC by its legal name, states the jurisdiction of formation, references the articles of organization, and defines the company's business purpose. A broadly stated purpose clause provides flexibility for the company to expand into new activities without needing to amend the operating agreement.
Capital Contributions and Membership Interests
This clause documents each member's initial capital contribution, whether in cash, property, or services, and assigns the corresponding ownership percentage or membership interest units. It also addresses procedures for additional capital calls, the consequences of a member's failure to contribute, and whether interest is paid on capital accounts.
Management Structure and Voting
The management section establishes whether the LLC is member-managed or manager-managed, defines the authority and duties of managers, specifies voting rights and procedures, and identifies which decisions require simple majority, supermajority, or unanimous consent. This section is critical for preventing deadlock in multi-member LLCs.
Profit and Loss Allocation and Distributions
This provision defines how profits and losses are allocated among members for tax purposes, which may differ from the schedule for actual cash distributions. It establishes the timing and amount of distributions, reserves for company operations, and ensures compliance with tax allocation rules that require distributions to have substantial economic effect.
Transfer Restrictions and Buy-Sell Provisions
Transfer restrictions protect the remaining members by requiring approval before a membership interest can be sold or assigned to a third party. Buy-sell provisions establish a mechanism for valuing a departing member's interest and the terms under which it must be purchased, often triggered by death, disability, retirement, or withdrawal.
Dissolution and Winding Up
This section defines the events that trigger dissolution, such as unanimous member vote, judicial decree, or the occurrence of events specified in the agreement. It establishes the winding-up procedures including liquidating assets, satisfying creditor claims, and distributing remaining proceeds to members according to their capital account balances.
Dispute Resolution
The dispute resolution clause establishes the procedure for resolving conflicts among members, typically through negotiation, mediation, and binding arbitration before litigation. Including a well-drafted dispute resolution mechanism can save the company significant legal costs and preserve business relationships during disagreements.
LLC Operating Agreement Legal Requirements
Several states including New York, California, Delaware, Maine, and Missouri legally require LLCs to adopt an operating agreement, and failure to do so may result in penalties or adverse legal consequences.
The operating agreement must be consistent with the articles of organization filed with the state, and any conflicts between the two documents are typically resolved in favor of the articles of organization under most state LLC statutes.
Tax allocation provisions in the operating agreement must comply with IRS regulations requiring allocations to have "substantial economic effect" under Section 704(b) of the Internal Revenue Code to be respected for federal tax purposes.
If the LLC is manager-managed, the operating agreement should clearly define the scope of the manager's authority because third parties are entitled to rely on the apparent authority of a manager to bind the company in ordinary course transactions.
The operating agreement should comply with the state's LLC act regarding member and manager fiduciary duties, which some states allow the operating agreement to modify or waive to varying degrees.
Common LLC Operating Agreement Mistakes to Avoid
Operating a single-member LLC without an operating agreement, incorrectly believing it is unnecessary, when in fact the document is essential for establishing the LLC as a separate entity and preserving the limited liability protection that prevents creditors from reaching personal assets.
Allocating profits and losses equally among members without regard to unequal capital contributions or workload, which creates resentment and potential legal disputes as the business grows and financial stakes increase.
Failing to include buy-sell provisions or transfer restrictions, which can result in a departing member selling their interest to an incompatible third party or a deceased member's interest passing to heirs who have no interest in or knowledge of the business.
Omitting provisions for resolving management deadlocks in a 50-50 two-member LLC, which can paralyze the company and force expensive judicial intervention when the members disagree on a critical business decision.
Using a generic template without customizing it to reflect the actual agreement among the members regarding capital contributions, management responsibilities, decision-making authority, and distribution preferences.
Frequently Asked Questions About LLC Operating Agreements
What is an LLC operating agreement?
Does a single-member LLC need an operating agreement?
What should an LLC operating agreement include?
Is an operating agreement legally required?
Can I write my own LLC operating agreement?
What happens if an LLC has no operating agreement?
How do I amend an LLC operating agreement?
What states require an LLC operating agreement?
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