Step-By-Step Guide for Creating an Operating Agreement
Let's break down the usual sections and provide some explanation for each to guide you.
1. LLC Name and Purpose
By now, you should know your LLC's name—it's the one you registered when you filed your LLC formation document. You also need to explain your LLC's purpose. Keeping a general statement allows you to take on new ventures without re-filing.
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. Management Structure - Member-Managed or Manager-Managed
Here, specify if your LLC will be either member or manager-managed and outline the rights and responsibilities of each member. Topics include capital contributions, voting rights, and management structures. Even if you're the sole member, this section is crucial for establishing your single-member LLC.
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 responsible for handling vital documents on behalf of your company. While some LLC operating agreements include this information, it's not mandatory because you list a registered agent in your formation documents.
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
LLC duration is the planned lifespan of your LLC, as described in your formation documents. Many business owners choose a perpetual duration, which means the LLC will exist indefinitely. However, you can specify a fixed period or end date.
Florida LLCs are typically considered "perpetual" by default. You can include a sample provision to reflect this in your operating agreement.
The duration of the Company will be perpetual.
5. Capital Contributions
Capital contributions are the funds, property, or services you invest to kickstart your LLC. For single-member LLCs, capital contributions can come entirely from you as the sole owner, giving you flexibility in your initial investment.
Properly documenting capital contributions helps provide a clear picture of your business's financial structure and offers essential 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
Indemnification provisions protect an LLC's members from specific costs related to legal issues arising from their work for the company. In such cases, the LLC covers any legal fees or damages if a member faces a lawsuit tied to their duties.
Your agreement should clearly define when the LLC provides this protection and any exceptions. Indemnification usually doesn't cover intentional wrongdoing or severe negligence. Tailor these terms to your unique business risks to ensure adequate protection.
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
Florida LLCs can be taxed as sole proprietorships, partnerships, S corporations, or C corporations. Your tax status depends on your number of members and the classification you choose with the IRS.
Include sections related to tax status in your operating agreement. Discuss your chosen status, how to change it, and how to handle tax returns and allocations. This helps your LLC plan for handling business finances, including 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. Distribution of Profits and Losses
Though not very important for single-member LLCs, for multi-member LLCs, the profit and loss distributions clause specifies when and how cash distributions will occur.
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
To change any term in your LLC, follow the LLC amendment clause. The process is more straightforward for single-member LLCs. For multi-member LLCs, consider voting percentages and requirements for amending the 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
Unlike corporations, LLCs typically aren't required to follow corporate formalities. However, this could jeopardize your corporate veil. Including a corporate formalities waiver in your agreement is a wise precaution.
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
The dissolution clause outlines the plan for ending an LLC, designating who maintains control in the event of your death or early departure from the company.
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 when the agreement becomes active.
Do you need to formally file your Agreement?
No! Your operating agreement is an internal document—keep it in your company records alongside a signed copy for easy access.
What If You Need to Add Another Member to Your LLC Later?
If your business expands, you can certainly add another member later on. Just modify the relevant documents according to the new member’s agreed terms. It's likely necessary to draft a new agreement, as multi-member LLC agreements often differ from single-member ones.