Limited Liability Company (LLC) operating agreement is a legal document that establishes relations between company members and sets up their rights and obligations, powers and liability, internal policies and rules, etc.
As its name suggests, an LLC limits the responsibility of its members, which means they are not personally responsible for debts or obligations that the company has.
An LLC operating agreement is as crucial as articles of organization – the document that proves the formation of the company. What should be included in an operating agreement and what to take into account – everything is enclosed in this article!
Creating an LLC is not that hard if one follows all the necessary steps and pays close attention to each stage.
Choose the state of incorporation
There are a few states such as Florida, Wyoming, Texas, Nevada, Delaware that are famous for their favorable tax laws. Therefore, they might be considered more convenient for running a business. In the case of online businesses, the location has no importance, so it’s easy to set up an entity in any state. However, when serving a local public offline, an entity should be registered within the state of its operation.
If you plan to set up your LLC in a different state, you will need the help of a registered agent (RA) who will be a resident of the state where you want to establish your company. Such agents are usually offered by professional services.
Select the name of your business entity
Choosing the name for your company entails customers’ perception of it, which is why it is a very important step in setting up an LLC. The name should be catchy, concise, but it should also reflect the niche your business is involved in. As well as that, it should include the words “Limited Liability Company” or LLC or another state-approved abbreviation.
Please note that your corporate name cannot repeat already existing names. It might be hard as with the huge amount of companies in every state, you should apply some creativity to come up with a name that is not already taken by someone else.
For instance, a name that would consist of “[State] [Niche of business] LLC” is unlikely to be free, which can be easily checked with the use of the respective Secretary of State’s office website. For example, to check existing business names in California, use the database of business entities provided on the California Secretary of State website.
Pay attention to the status of the entity – if it is dissolved, the name can be taken, but you cannot do that if an entity has an “active” status.
Such online systems also allow for reserving the preferred name for a certain amount of time before filing the articles of incorporation. By paying a small fee, you get a chance to retain the chosen name for the period from 30 to 120 days. The maximum period of the reservation is state-specific.
Contemporary businesses cannot go without websites, that’s why it is also important to think in advance about your website’s name before registering the name of your LLC. If you want them to match perfectly, try to find an available domain first and then choose a similar name for your LLC.
Important: make sure that the business name you are about to use isn’t trademarked. For example, you won’t be able to register “Puma LLC” and produce sneakers in the state of New Hampshire or make carbonated drinks under the “Coca Cola LLC” name in Texas. However, it is possible to create “Puma LLC” in order to make food for wild cats. The agency called the United States Patent and Trademark Office (USPTO) will be the one to accept or reject the trademark registration.
Select an agent for your business
Every LLC needs a person who would collect different types of legal notices for them. This individual should be mentioned in both the articles of organization and LLC operating agreement.
Either a member of a business entity or a third party can be nominated as a registered agent. Note that another business entity can serve as an agent too, but an individual should sign the articles of the organization on the entity’s behalf.
In single-member LLCs, you might act as a registered agent yourself, if it is allowed by your state.
As was mentioned above, an RA should have a physical address in the state of the company’s incorporation.
Determine the ownership
Every LLC issues a certain number of ownership shares, that is, units that are spread among its members.
All units issued constitute 100%, so if the company issued 100 units, and one member gets 50 units, their ownership percentage is 50%. This percentage might vary depending on adding new members to your LLC.
The ownership interest includes an economic interest (that is, how much profit a member gets) and a management interest (that is, the amount of voting power a member has in the company).
The number of members is completely up to the creators. State laws allow for creating an LLC with just one member, and there is no limitation as to the maximum number of members in a limited liability company. But there is a general recommendation to keep the number of members small.
You should also choose an authorized representative. This is a member of an LLC who has the authority to act on the company’s behalf, for example, open up a bank account for their business entity.
It is important to choose the LLC ownership structure before filing the articles of organization.
File the articles of organization
Depending on your state, you will have to pass a certain procedure of filing the documents of the establishment. They may be sent by mail or online to the local Secretary of State’s office.
In your articles of organization, you should mention:
Pay the filing fee
After filing the articles of organization, you will have to pay a filing fee for registering your limited liability company – from $50 to $800. You can pay the fee online or by check. Once the appropriate Secretary of State’s office gets your payment, the registration process will start. It might take up to 30 days. After that, the new entity is considered active.
Get an Employer Identification Number
Upon the creation of your LLC, you should obtain an EIN which is needed for every LLC to open bank accounts and make payments to tax agencies. It is critical not to delay completing this step as if it’s not done, your company won’t be able to conduct business transactions and generate profits. Luckily, the process of getting an EIN is easy. All you need to do is to send an online application on the IRS website or send a specific application form by mail. The process won’t take more than 15 minutes.
Craft an operating agreement
This stage should take place after your LLC gets a status “active.” An operating agreement is not a document that should be sent to a governmental agency, but it is important to keep it for your own record. The importance of operating agreements is also connected with it being the only document that has information about the ownership percentage of your LLC.
Writing an operating agreement requires a lot of attention and revising. You need to include all of the necessary provisions about your company’s operation which would help protect its members from personal liability. To craft a legally binding document that would include all the information that should be in LLC operating agreements, use our online document builder. It will let you create a customized operating agreement in less than 15 minutes!
Depending on the number of members, there might be single-member and multi-member LLCs. An LLC operating agreement for those two types of entities will serve the same purpose but have a slightly different form. Let’s see how those two documents will differ.
The main purpose of such an operating agreement is to solidify the company’s status as a separate business entity and separate it from the establisher’s personal property. The document should list the role of the owner in the LLC. The operating agreement should also list the other positions such as registered agents, managers, etc. It is not required to be filed with any governmental agency but it should be kept in the owner’s records at the principal’s place of business.
Even though there is no formal requirement for a single-member operating agreement to be notary acknowledged, it is highly recommended to sign the operating agreement in front of a notary to prove that the document is authentic and was signed on the exact date mentioned in it.
This type of operating agreement is devised for LLCs that have more than one owner. It is an essential document as it indicates who owns the company, what percentage of the LLC they own, etc. The operating agreement should be signed in the presence of a notary, and copies should be given to all members of the company. The original should be kept at the company’s principal office address.
In a multi-member LLC operating agreement, there should be information about:
But let’s consider each of the provisions in an LLC operating agreement in more detail.
An operating agreement is a centerpiece of every LLC. It is a comprehensive document that includes a lot of information on the owners, their powers, responsibilities, etc. If all the important details are included in an operating agreement, an LLC status will be protected, and LLC will not resemble a sole proprietorship or partnership, which could jeopardize its members’ personal liability.
Every LLC operating agreement should include the following provisions.
In the very first provision of the LLC operating agreement, you should include the date of the agreement and state where it takes place.
This provision should also state when the company was formed, its formal name (we tell how to pick it above in the text), and the registered office of the business entity.
It should also include the business purpose and duration of the operating agreement.
Another piece of information that should appear here is the type of your LLC. A limited liability company can be single-member and multi-member. It should be stated in the operating agreement so that it can help prove the company’s status in case it is questioned by any third party, for example, the court.
This section encompasses the following clauses:
This section should tell who has the power to manage the LLC (it can be members or managers). If managers are chosen, their names and number should be included. The clause should state the powers given and whether there is any compensation they will get.
Along with that, the provision should include the procedure of how managers should be appointed, when manager meetings can be held, what actions are allowed without organizing a meeting, etc. Another piece of information that should be included is how managers can be removed or replaced.
Even though there is a default rule of voting in proportion to a member’s percentage interest, it can be altered in an LLC operating agreement. The operating agreement can also allocate rights of veto or supermajority votes among certain members or managers.
In this section of your operating agreement, you should stipulate in what situations members and managers should be held harmless, and when the company indemnifies them.
This provision of the operating agreement is self-explanatory. It deals with record keeping and the rights of members to inspect corporate and accounting records of the LLC.
Generally, members of an LLC are required to hold meetings at least once a year. In this section of your operating agreement, you should also include information about:
In this section of your LLC operating agreement, the following information should be outlined:
The clause should concern what will happen if a member of the LLC dies or becomes disabled. Usually, the options are to keep the company active or to terminate it.
The section of your operating agreement should specify actions that would allow for the dissolution of the LLC and sale of all its property. The other information it should provide is how the assets should be distributed upon the dissolution of the LLC, if it possible for a member to withdraw their funds from the capital account when the business entity should be dissolved, etc.
This section should tell that any changes to your LLC operating agreement cannot be made without the written consent of all or majority of the members.
This provision should enclose any other terms of the operating agreement that were not included in the previous clauses.
If you plan to be the only owner of your LLC, you might wonder – how a single-member LLC differs from a sole proprietorship? Both business structures are common, and both of them offer flexibility and simplicity, but how to chose what fits you best?
Let’s have a brief look at their common features and figure what makes those two business structures different.
In an LLC, owners do not bear personal responsibility for their company’s debts and liabilities. However, in a sole proprietorship, there is no separation between business and personal responsibility, which is why the owner is responsible for all of the liability of their business, and creditors can use their home, car, or personal bank accounts to pay debts.
Another difference is that in a sole proprietorship, business owners can use personal and business account interchangeably, but an LLC owner has to keep business funds separate from personal.
For an LLC, states require registering the name that should include the fully written type of business structure or its abbreviation. For a sole proprietorship, there is no such requirement set by state laws. But if a business owner wants to operate under their own name, they should choose a DBA (doing business as) name and register for it in their home state.
Both business structures face the pass-through taxation procedure. It means that their profits are taxed only once. In both cases, the Profit or Loss from the Business form should be submitted to the respective agency.
The only difference is that LLC is more flexible and can pay taxes as a corporation or sole proprietorship when the latter has only one option.
As you can see, an operating agreement cannot be done in one sitting. Luckily, nowadays, there are a lot of free templates available on the net. But can you trust all of them? Isn’t it better to use a document provided by a professional service? If you want to get an attorney-verified customized operating agreement that would include everything written in this article, use our document builder. It will help you save loads of time and not miss out on any important detail. The added benefit is that the operating agreement you will get is easy to download and print.