How do I write my operating agreement?
We'll walk you through the typical provisions and provide sample language for each to help you along the way.
1. Name and Purpose of your LLC
You should already be familiar with your LLC's name (it's the one you chose when filing your LLC formation documents with the state). However, you'll also need to clearly state the purpose of your LLC. Keeping this statement fairly general allows you the flexibility to pursue new opportunities without having 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
This part specifies whether your LLC will be either member or manager-managed. It also defines the rights and responsibilities of each member, including capital contributions, voting rights, and the management structure. This may appear unnecessary for a single-member LLC, but it's essential 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 receiving and handling important documents on behalf of your company. Some LLC operating agreements include this information, but it's not absolutely necessary, as you listed this when filing your formation documents 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 intended lifespan of your Limited Liability Company, as stated in your formation documents. While many entrepreneurs form LLCs with the intent to operate indefinitely, you can also specify a fixed period or end date.
By default, most states consider LLCs "perpetual," meaning they can exist for as long as you choose. The majority of Ohio LLCs opt for a perpetual duration. Here's a sample provision:
The duration of the Company will be perpetual.
5. Capital Contributions
Capital contributions are the funds, property, or services you contribute to your LLC to kickstart its operations. This is essentially the initial investment you make to get your business up and running. For single-member LLCs, you have the flexibility to decide how much money or assets you'd like to invest, as you're the sole owner.
Properly documenting your capital contributions is crucial, as it helps clarify your business's financial structure and provides 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
An indemnification provision in your LLC's Operating Agreement serves as a safety net to protect members from certain costs tied to legal issues that may arise from their work for the company. In other words, the LLC will cover any legal fees or damages if a member faces a lawsuit related to their duties for the business.
The agreement should clearly outline when and under what circumstances the LLC will provide this protection, as well as any exceptions. Generally, indemnification doesn't cover intentional wrongdoing or serious negligence. It's important to tailor these terms to your business's specific risks to ensure proper 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
Your Ohio LLC can be taxed in four different ways: as a sole proprietorship, partnership, S corporation, or C corporation. The taxation method depends on the number of members in your LLC and the tax status your business opts for with the IRS.
These tax-related sections should be included in your LLC's operating agreement to discuss your chosen tax status, how you can alter it, and how you handle tax returns and allocations, if applicable. This plans your LLC's approach to handling business finances, including profits, losses, dividends, and taxes and offers a prudent strategy for managing any tax-related issues that could come up.
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 clause simply states when your LLC will distribute its profits. For single-member LLCs, it's not vital. For multi-member LLCs, it's important to stipulate when and how distributions will take place, and what is required for this to 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
If you need to alter any terms in your LLC, you'll use your LLC amendment clause. For single-member LLCs, it's much easier. For multi-member LLCs, it requires careful thought, especially in terms of voting percentages and the requirements for amending 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
Naturally, LLCs aren't obligated to follow corporate formalities like corporations. However, not adhering to these formalities could potentially affect your ability to maintain your corporate veil. For this reason, it's advisable to include a waiver of all formalities 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
This section outlines what to do if things don’t go as planned. It guides you on how to dissolve your LLC and decide who will maintain control in the event of your death or incapacitation.
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. Another way to think about it is that it's the day the agreement comes into effect.
Do I need to file my Agreement?
No, you don't! Unlike your Articles of Organization (or Certificate of Formation, depending on your state), your operating agreement is an internal document. Sign it and keep a copy in your company's records — easy as that!
What if I need to add another member to my LLC later?
As small business owners, we often dream about expanding our businesses beyond what we can handle alone. If you reach this enviable position and are ready to add another member to your LLC, you'll need to redo the paperwork in line with the agreement between you and the new partner. You'll likely want to create a different agreement, as a multi-member operating agreement differs significantly from a single-member operating agreement.