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How do I write my operating agreement?
Let's take a stroll through the common provisions of an Operating Agreement while providing some sample wording to help you craft your own.
1. Name and Purpose of your LLC
You should already have a name for your LLC (from when you filed your Articles of Organization with the state), but you'll want to clearly state the purpose of your LLC in the Operating Agreement. You don't need an ultra-specific description; a general statement leaves room for new ventures without needing to refile.
OPERATING AGREEMENT of [COMPANY NAME]
This operating agreement is adopted as of [Date] (the “Effective Date”), by [Member’s Name], an individual and the sole member (the “Member”) of [Company Name] (the “Company”).
The Member hereby adopts this agreement as the operating agreement of the Company, which agreement sets forth the entire understanding of the Member regarding its subject matter and supersedes all prior understandings and agreements regarding its subject matter.
The purpose of the Company is [Company Purpose], and the conduct of other activities as may be necessary or appropriate to promote the stated purposes, and to engage in any other lawful business or activity for which a limited liability company may be organized under the Act.
2. LLC Management - Member or Manager
In this part, you'll specify whether your LLC will be member-managed or manager-managed. You'll also outline each member's rights and responsibilities, such as capital contributions, voting rights, and the management structure. While it might feel unnecessary as a single-member, it's vital to establish your single-member LLC's foundation.
Member-Managed LLC.
The business and affairs of the Company will be managed by the Member. The vote, action, decision, or consent of the Member will constitute a valid decision of the Member and the Company. The Member may appoint one or more officers (including the Member, if the Member is an individual) who will have such powers and authority to act on behalf of the Company granted to them by the Member.
OR
Manager-Managed LLC.
The business and affairs of the Company will be managed by the manager of the Company and any successor thereto appointed by the Member, which manager may also be referred to as the Company’s president (the “Manager”). The initial Manager will be [Manager Name], who will serve until the Manager’s death, removal by the Member (for any reason or no reason), or resignation. The Manager will have the right and authority to manage the affairs of the Company and make decisions and take action with respect thereto without further approval or consent of any kind by the Member. Except as otherwise required by this agreement and in lieu of any limitations set forth in [State Name]’s laws for limited liability companies (the “Act”), the Manager will be solely responsible for and is hereby authorized to manage and operate the business of the Company. Except to the extent that the authority of the Manager is expressly limited by the Member, the vote, action, decision, or consent of the Manager will constitute a valid decision of the Manager and the Company.
3. Registered Agent
A registered agent is the individual responsible for receiving and processing essential documents on behalf of your business. Some Operating Agreements include this provision, but it's optional since the registered agent is listed in your Articles of Organization filed with the state.
The Company’s registered agent in State is: Registered Agent Name, Address. The members may designate other registered agents or offices at any time in this state or, if necessary, in other states.
4. Duration of Your LLC
The term of an LLC refers to the lifespan of your Limited Liability Company, as outlined in your Articles of Organization. Many entrepreneurs form LLCs with the intent to operate them indefinitely. However, you can also choose a fixed period or end date. In most states, including Minnesota, LLCs are "perpetual" by default, allowing them to exist as long as you desire.
The duration of the Company will be perpetual.
5. Capital Contributions
Capital contributions are the initial funds, property, or services you invest in your LLC to kick off its operations. Look at it as your first investment to bring your business to life. In a single-member LLC, you, as the sole owner, have the flexibility to decide how much to contribute to your business.
Accurately documenting your capital contributions is crucial, as it offers a transparent financial structure for your business and provides necessary details for tax purposes.
The Member’s capital contribution(s) to the capital of the Company for the Member’s membership interest in the Company will be reflected on the books and records of the Company.
OR
The members have made or shall make the contributions of cash, property or services to the LLC as set forth on Exhibit A attached
6. Indemnification
The indemnification clause in an Operating Agreement serves as a safety net, protecting your LLC's members from specific costs associated with legal issues resulting from their duties to the company. This means the LLC would cover legal fees or damages if a member faces a lawsuit tied to their work for the business.
Your agreement should outline the circumstances when the LLC will offer this protection and any exceptions. Typically, indemnification doesn't cover intentional wrongdoing or gross negligence. Customize this provision according to your business's unique risks to ensure adequate coverage.
The Member, the Manager, the officers, and the organizer of the Company and their respective affiliates, stockholders, members, managers, directors, officers, partners, employees, agents, trustees, and representatives (individually, an “Indemnitee”) will be indemnified by the Company against any and all losses, claims, damages, liabilities, expenses (including legal fees and expenses), judgments, fines, settlements, and other amounts arising from any and all claims, demands, actions, suits, or proceedings, civil, criminal, administrative, or investigative, in which the Indemnitee may be involved, or threatened to be involved, as a party or otherwise by reason of the Indemnitee’s status as any of the foregoing, which relates to or arises out of the Company or its assets, business, or affairs, if in each of the foregoing cases (A) the Indemnitee acted in good faith and in a manner the Indemnitee believed to be in, or not opposed to, the best interests of the Company, and, with respect to any criminal proceeding, had no reasonable cause to believe the Indemnitee’s conduct was unlawful, and (B) the Indemnitee’s conduct did not constitute gross negligence or willful or wanton misconduct. The termination of any action, suit, or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere, or its equivalent, will not, of itself, create a presumption that the Indemnitee acted in a manner contrary to that specified in clause (A) or (B) above. Any indemnification under this section 5 will be made only out of the assets of the Company, and the Member will not have any personal liability on account thereof.
7. LLC Tax Status
Your Minnesota LLC could be taxed in one of four ways: as a sole proprietorship, partnership, S corporation, or C corporation. How it's taxed depends on the number of members and the tax status your business selects with the IRS.
Include sections related to tax status in your Operating Agreement, discussing your chosen tax status, how to change it, and the handling of tax returns and allocations (if applicable). This clarity will help your LLC manage finances effectively, covering profits, losses, dividends, and taxes.
The Company will be disregarded for federal and state income tax purposes. The admission of one or more additional members, however, will cause the Company to be recognized for tax purposes, and to be taxed, as a partnership.
OR
The Member acknowledges that the Company has elected to be taxed as a corporation for federal tax purposes pursuant to the regulations currently in effect under Section 7701 of the Code, and to be taxed as an electing small business corporation under the provisions of Subchapter S of the Code. Notwithstanding such tax treatment, the Member acknowledges and agrees that the Company will be a limited liability company, for state law purposes, under the provisions of the Act, the Articles of Organization, and this operating agreement.
The Member acknowledges that the Company has filed or will timely file a Form 2553 (Election by a Small Business Corporation) with the Internal Revenue Service and that the election made pursuant to the filing is or will be in force and effect covering all periods since the date of this operating agreement. Except as otherwise provided in this operating agreement, during the term of this operating agreement and the continuation of the Company’s “S” corporation election under Section 1362 of the Internal Revenue Code, no Member shall take any action which would cause the revocation or termination of the Company’s “S” election (under Section 1362(a) of the Internal Revenue Code) and any attempt to take such an action will be null and void and without effect. Without limiting the foregoing, and notwithstanding any provision hereof to the contrary, any transfer or attempt to transfer any membership interest to any of the following will be null, void, and without effect:
(a) a person whose ownership thereof would cause the Company to have a number of Members and assignees of membership interests (shareholders of an “S” corporation) greater than the number permitted by Section 1361(b)(1)(A) of the Internal Revenue Code;
(b) an individual who is not a United States citizen or resident;
(c) a trust (or the trustee thereof) which fails to satisfy the requirements of Section 1361(c)(2)(A) or 1361(d) of the Internal Revenue Code;
(d) a corporation; and
(e)any other entity whose ownership would cause the termination or revocation of the Company’s tax status as an “S” corporation.
8. Profit and Loss Distributions
This provision clarifies when your LLC will distribute profits. For single-member LLCs, this isn't as important. However, for multi-member LLCs, it's essential to specify the distribution requirements and how they will occur to avoid potential conflicts.
Remember to keep the tone of your writing clear, concise, and approachable. Legal GPS's voice aims to make complex legal subjects digestible for everyday entrepreneurs. With a friendly and informative tone, you'll empower readers with knowledge without overwhelming them with technical jargon.
As the sole member of the LLC, the Member is entitled to all profits of the LLC and is responsible for all its losses. Profits and losses shall be determined annually and will be allocated to the Member's capital account. Distributions of cash or other assets will be made at such times and in such amounts as deemed appropriate by the Member.
9. Agreement Amendments
So, what should you do if you need to change any term in your LLC? It's a breeze, you just follow your LLC amendment clause. For single-member LLCs, the process is relatively straightforward. For multi-member LLCs, you'll have to put a bit more thought into it, considering key issues such as voting percentages and the requirements to amend the operating agreement.
This agreement and the articles of organization of the Company may not be altered, modified, or changed, and no provision of this agreement may be waived, except by an amendment or waiver, as applicable, approved by the Member.
10. Corporate Formalities Waiver
By nature, LLCs usually aren't required to follow stringent corporate formalities. That's generally a corporation's area of operation. However, in some situations, skipping formalities could jeopardize the maintenance of your corporate veil. To play it safe, we like to include a formalities waiver in the operating agreement.
The failure of the Company or the Member to observe any formalities or requirements relating to the exercise of its powers or management of its business or affairs under this operating agreement or the laws in the state in which the Company is which govern limited liability companies will not be grounds for imposing personal liability on the Member for liabilities of the Company.
11. Dissolution
We all know things might not always go as planned. The dissolution clause is your plan B. It guides you on how to dissolve your LLC and designate who will control the LLC in the event of your absence or demise.
Upon the occurrence of any event which terminates the continued membership of the Member in the Company, the Company will not be dissolved, and the business of the Company will continue. The Member hereby specifically consents to such continuation of the business of the Company upon any such event. The Member’s legal representative, assignee, or successor will automatically become an assignee of the Member’s interest and will automatically become a substitute Member in place of the withdrawn Member.
12. Effective Date
The effective date of your operating agreement is the day the agreement becomes valid and enforceable. Another way to think about it is like the day on which the agreement starts working its magic in managing your LLC.
Do I need to file my Agreement?
Absolutely not! Unlike your Articles of Organization (or Certificate of Formation, for some states), your operating agreement is an internal document that you keep within your business records. Simply sign a copy and keep it in a safe place where you can easily locate it when necessary.
What if I need to add another member to my LLC later?
As small business owners, we often dream of our business expanding to a point where we can't manage it alone. If you're fortunate to find yourself needing to bring in additional members to your LLC, you'll need to revise your operating agreement according to the new arrangement. More likely than not, you'd want to develop a new agreement, because the dynamics of a multi-member operating agreement are significantly different from a single-member one.
In essence, creating an operating agreement involves some serious thinking, but don't let it intimidate you. You're simply spelling out how you want your business to run. If you're concise, clear, and approachable in your wording, you'll be amazed at how simple it can be to translate legalese into everyday entrepreneur language. You've got this!