To be an LLC member, an individual or corporation provides capital contributions in exchange for a percentage of ownership interest in the company. Use Create Your LLC Operating Agreement FREE template download to describe each member’s contributions to your company and their role in internal management. 

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Do I need an Operating Agreement for my LLC?

If you decide to form an LLC in Delaware, Maine, Missouri, or New York, state laws require you to create an Operating Agreement (though you don’t need to file the document with the government). If your state does not require a written company agreement, you should keep in mind that this document is crucial to your company’s internal operations.

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An Operating Agreement makes important company processes clear, including how to distribute profits and losses and which members have the authority to bind the company to legal contracts.

As such, multi-member LLCs can use this agreement to reduce the chances of disputes between members. Single-member LLCs may also benefit from an Operating Agreement, especially if the sole member relies on a manager to conduct company business. 

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Without an LLC Operating Agreement, any legal actions against your company will rely on the provisions established by your state’s LLC code. Creating a company agreement allows you to exert more control over the rules that govern your company’s management. 

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What does an LLC Operating Agreement include?

1. Company Information

Include the company’s name, the industry your business operates in, a description of your services, and the main office address. Consider also writing a company purpose, which is a description of the goals your company sets out to achieve. 

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2. Membership Information

Provide details on the roles and responsibilities of each member:

• Their full name and address

• The value of their capital contributions (including cash, equipment, and sweat equity)

• Their membership class (e.g., Class A members have full voting rights)

• Percentage of ownership 

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Specify the rules that govern the members of your LLC: 

How to distribute assets when a member leaves or if the company dissolves

Whether a member can voluntarily leave the LLC 

If and when a member can compete against the company

How to admit new members

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3. Management Details

Establish the rules for business management, including:

• Who manages the company (the members or designated managers)

• How often the members hold meetings

• The weight of each member’s vote

• Which actions require unanimous consent

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4. Administration Processes

Describe the financial and administrative aspects of your LLC, including:

• The business’s tax classification (either a disregarded entity, a partnership, or a corporation)

• The fiscal year-end for your company

• Whether you will elect out of unified tax audit rules (if applicable)

• How to distribute profits and losses to members (either in equal shares, a fixed percentage, or in proportion to capital contributions)

• Which reports to include in the annual report to members (e.g., income statements and balance sheets)

 

5. Other Details

The Operating Agreement may also specify who has the ability to sign contracts on behalf of the company and methods used to resolve disputes.

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The purpose of unanimous consent on some actions but not others of an LLC?

To protect the interests of individual members, a company may require unanimous consent for certain actions—especially when a business decision has a significant impact on the success of the LLC. For example, members may require unanimous consent on critical issues, such as:

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1. The assignment of ownership rights of company property

Members can prevent unauthorized behavior involving company property by requiring unanimous consent for selling, loaning, mortgaging, or trading company property. 

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2. Incurring company liabilities over a fixed dollar amount

Expansion of the LLC may require significant financial investment with a large debt load. To limit the risk to individual members, they may set a dollar amount for acceptable levels of liability. Any liability over that amount would require the consent of all members. 

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3. Incurring expenses over a fixed dollar amount

Members can control unauthorized spending by setting a limit on individual transactions. Any expenditures over this amount would require the consent of all members. 

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4. Releasing any company claim except for payment in full

The company may have a legal claim against another person or business entity, such as when someone owes the company debt. In this case, it’s in the members’ best interest for these obligations to be paid in full.

As such, members may require unanimous consent before releasing a claim for less than full consideration.

 

How government agencies see taxes of an LLC?

Your LLC’s tax classification affects how you file federal income tax for your business. Contact a tax lawyer or a qualified accountant for help deciding which tax system works best for your business. 

The unified tax audit rules (facilitated by the IRS) automatically apply to any business entity that is taxed as a partnership. These rules do not apply to single-member LLCs or to those that elect to be taxed as corporations. 

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Generally, an LLC that has at least two members which is treated as a partnership for tax purposes. In this case, the business does not pay income tax but does pay employment and excise taxes. Each partner reports their earnings from the LLC on their personal tax return.

 

A single-member LLC is treated as a disregarded entity (also known as a sole proprietorship). In this case, the owner reports the company’s income and expenses on their personal tax return. However, a single-member LLC can elect to be taxed as a corporation instead.

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A corporation gets taxed at the company level, and each member is responsible for paying income tax on any distributions. In effect, this creates two levels of taxation (i.e., a double tax). 

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How do I change the terms and conditions in an LLC Operating Agreement?

You can change the terms of an LLC Operating Agreement only if the changes are documented in writing and signed by all the members of the LLC. Use Create Your LLC Contract Addendum to make changes to your existing Operating Agreement. 

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How do I file my LLC Operating Agreement?

Although a few states require LLC members to create an Operating Agreement, you don’t need to file this internal document with the government. Instead, states require you to file your company’s Articles of Organization and annual reports.

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Refer to your state’s code for the requirements of forming an LLC.