Operating Agreement

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An individual or a group of people looking to conduct a business may organize themselves in a legal entity called limited liability company (LLC) and run a company through an operating agreement.

Described as the hybrid of a partnership and a corporation, some of the benefits of organizing a LLC over partnerships or corporations are its simplicity and flexibility.

LLC members are also taxed individually on their earnings. They also cannot be held personally liable for LLC’s debts or liability, except in case there is a crime or fraud committed by one or all of the members.

What is an LLC Operating Agreement?

If you are thinking of forming a LLC, one of the basic things you need to have is a LLC operating agreement, which is an agreement that allows the owners or partners (called members) of the LLC to structure their financial and working relationship with each other. It is an internal document that outlines your business processes, the LLC members’ responsibilities and contributions, and even rules on dispute resolutions.

An LLC Operating Agreement is an essential part of an LLC. Note, however, that some US states do not legally mandate a LLC operating agreement. Yet it is prudent to always have an operating agreement in place to make sure your business decisions and management are in line with your business purposes, company rules, and State and Federal law.

What Is Included in a LLC Operating Agreement?

An ideal LLC operating agreement template should outline as much information as possible to ensure that problems can be addressed immediately and conflicts can be resolved properly. It must be clear and unambiguous, so that there is no room for a different interpretation.

There are information details that should be included in a LLC operating agreement. They are the following:

Basic information about the company

  • Company name
  • Company address
  • Date company was formed
  • Details of the registered agent
  • Primary purpose and description of services
  • Secondary purposes, if any
  • Whether single-member or multi-member

Basic information about the member/s

  • Names and contact information of each member
  • Capital contribution of each member
  • Ownership of each member
  • Share in profits and losses
  • Rights and responsibilities
  • Details and contact information of the assigned manager, if any

Fiscal or accounting details

  • End of fiscal year
  • Manner of record-keeping
  • Information on profit distribution

Other business processes

  • Voting procedures
  • Member meetings
  • Rules on replacing or substituting members
  • Grounds for dissolution
  • Dispute resolution
  • Right of first refusal for multi-member LLC
  • Indemnification

Customizing your operating agreement is easy as long as you have a readily available template to follow. An operating agreement in PDF or a LLC bylaws template can conveniently be downloaded online for your perusal.

Why And When Is an Operating Agreement Important?

As mentioned an Operating Agreement for LLC is vital, whether you are looking to organize a single-member LLC or a multi-member LLC.

A single-member LLC can benefit from an operating agreement to help guide the member in making business decisions according to the purpose for which the LLC was formed. Meanwhile, a multi-member LLC can definitely reference the operating agreement especially in case of conflicts or disagreements in making financial and operational decisions.

An LLC operating agreement is a legal requirement in Delaware, New York, Maine, California and Missouri. Each state may have different requirements on what to include in the operating agreement. Needless to say, an operating agreement for LLC can help you run your business more smoothly.

How to Write a LLC Operating Agreement?

Writing a LLC operating agreement is easy. There are plenty of operating agreement templates online that you can utilize to save on costs while also making sure you comply with the basic requirements of a business operating agreement.

Write an outline of the information that you need to list down. For example:

  • Information about the company
  • Information about the member/s
  • Fiscal or accounting details
  • Voting procedures
  • Rules on replacing or substituting members
  • Grounds for dissolving the LLC
  • Dispute resolution

Fill in all the details and make sure to be as clear and concise as possible. Once you have finished drafting the operating agreement, ask each member to review. If all members have agreed to the contents of the LLC operating agreement, have them sign the document.

Make sure that each member has a copy of the agreement. Also, store the original one in a safe place.

An LLC Operating Agreement is crucial in running a smooth limited liability company. Whether or not you are in a state requiring an LLC operating agreement, making sure you have a set of rules to run your company on can help you achieve your business goals better and effectively.

Download an operating agreement for LLC today from CocoSign. We have over 10 different LLC operating agreement templates for you to look at.

Operating Agreement FAQ

Do you need a LLC Operating Agreement in every state?

You should endeavor to have a LLC Operating Agreement in every state where you do business, or at least in every state where you are registered. An operating agreement for LLC may be required in some US states and some state governments may require specific clauses or provisions of laws included in your operating agreement.

Is an operating agreement not the same as articles of incorporation?

Articles of incorporation (AOI) is similar to an operating agreement in that the AOI also outlines information about the company, the incorporators, the business purposes, and the shareholders, among others. The operating agreement, however, is not mandatory in forming a LLC in some states. Meanwhile, the AOI is a legal requirement when creating a corporation and registering it with the SEC.

What is the difference between an operating agreement for LLC and the LLC articles of organization?

Both the operating agreement and the articles of organization are documents that are critical when organizing a LLC. The key difference between the two is that the operating agreement is an internal document for the members, while the articles of organization (sometimes referred to as Certificates of Formation) is an external document that needs to be filed with the state where the LLC would like to be recognized as a legal business entity.

Can I amend the operating agreement?

Yes, amending the operating agreement for LLC is possible, as long as all members agree to and sign on the amendment.

What other forms or documents do I need when forming a LLC?

Other forms or documents that you might need are business plan, articles of organization and minutes of first meeting.

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