A multi-member LLC operating agreement is one of the most crucial documents you’ll need to get your business off the ground and ready to go. The agreement outlines the members of your LLC, as well as its purpose and name. The operating agreement also covers other important details for the management of your business for the entire time the LLC exists.
Having a well-written multi-member LLC operating agreement can help reduce tension between members and make it easier to run your business as it grows and changes.
It’s also critical to fully understand all of the legal requirements your LLC operating agreement has to fulfill. Without understanding the contents of the agreement and the regulations about LLCs, it can be easy to accidentally do something that forces your LLC to dissolve.
This article will cover everything you need to know to find a good LLC operating agreement template, how to fill it out, and how to make the most of your partnership with the other members.
Multi-member LLCs are similar to regular LLCs in every sense except that they have several founding members who run the LLC, while a regular LLC only has one person in control of the operation of the business.
LLC stands for Limited Liability Corporation. They are a good option for small businesses, entrepreneurs, and new business owners who are looking for a little more liability protection but who aren’t ready to form a more complicated business structure. Many people also start with an LLC to avoid the extra paperwork and hassle of other business types. They offer more protection than sole proprietorships but also share out some of the responsibility and benefits of the company among the members.
Multi-member LLCs are usually formed by at least two people who provide some upfront investment into the company in exchange for receiving a part of the profits and a say in how the business is managed.
However, multi-member LLCs aren’t allowed to seek other investors and have a few other limitations compared to other kinds of business structures.
The biggest and most obvious difference is that a single-member LLC operating agreement implies having only one operating member. It’s also usually more difficult for a single-member LLC to pass management of the company to someone else. Fortunately, it’s not quite as difficult as passing on the management of a sole proprietorship.
Since an LLC is considered a separate legal entity from its owners, the practical differences mostly come down to resources and management. Multi-member LLCs have to have more cooperation from members to function properly, but they can also often have more starting resources to work with as well.
Operating agreements are a required document for running an LLC. A general operating agreement outlines how your LLC will function, its main purpose, and other important details. For instance, an operating agreement can include a provision for the LLC to dissolve automatically if certain conditions are met.
Even if your state allows you to use other documentation to form a multi-member LLC, it’s important to have an operating agreement as early as possible in the process. That way you’ll have a guiding document that can help you keep your business on track and help make sure LLC funds are being used in an appropriate manner.
There are several people who could ask for your operating agreement when you’re getting your LLC set up. The operating agreement is considered standard paperwork for an LLC, so it’s one of the first things that is likely to be checked when your LLC is working with another company or business entity.
For instance, your bank might ask to look at your operating agreement when you apply to start a business account with them, or if you need to set up capital accounts for your LLC’s members.
Here are a few more people who might need to see your operating agreement before they start working with you.
Your registered agent may also ask for your operating agreement before agreeing to be your registered agent. In fact, it’s relatively common for your registered agent to ask to keep a copy of your operating agreement, especially if they aren’t also a member of your LLC, to keep safe and to keep their records organized.
Essentially, you should plan on anyone who might be interested in starting a business relationship with your LLC to ask to see your operating agreement. In some cases you might need to present an operating agreement because it’s required (like for certain bank accounts, investment opportunities, and lawyers), others may ask for your operating agreement simply because they want to learn more about your LLC before agreeing to a business relationship.
Having an operating agreement often isn’t a requirement of running your LLC, however, they are one of the most important optional documents because they offer another layer of protection for your LLC and its members.
Consider what would happen if, for instance, a member of a multi-member LLC is divorced, but doesn’t have a pre-nuptial agreement about how the assets of the LLC will be distributed? Your operating agreement can cover what would happen in that situation and can be critical for preventing your LLC from being thrown into chaos when life starts throwing a few hurdles.
Having an operating agreement is also critical for preventing disagreements between members. The more detailed your operating agreement is, the less likely your members will disagree about the basic management of the LLC.
Having that agreement is critical because without it you may lose business opportunities or struggle to reach important decisions. Your LLC might also risk lowering its reputation in your local business community if members of your LLC publicly disagree on important decisions.
There are a lot of things that should be included in a good operating agreement, but the exact contents will vary quite a bit depending on the nature of your LLC and it’s unique needs from its members.
You’ll need to include all the basic information about your LLC, including its name and formation date, in your operating agreement. The purpose of the LLC is also required, as is the location of your LLC’s office space and the registered agent who can be contacted on your LLC’s behalf.
It’s also important to clearly define the contributions each member of your LLC has made to the company. Initial contributions are important along with ongoing contributions and defining the circumstances when members will be expected to contribute. You can also outline the conditions under which your LLC’s members can expect distributions, their regular pay (if any), and how profits and losses should be handled by the LLC.
This section can be as detailed or sparse as you’d like, but more detail is typically a better option.
This section will outline the way the LLC will track information and what information needs to be kept on record. This section is generally more important the more members your LLC has because record books are an important way to keep tabs on how the LLC is operating and what it needs.
Thorough records can also help track if something unexpected happens or can reveal if one or more members of the LLC aren’t operating in good faith.
The last section that really needs to be in a good operating agreement is the section on how and when the LLC will dissolve. This section can outline specific circumstances, how assets will be dealt with when you’re dissolving the LLC, and when an LLC designed for a specific purpose will dissolve on it’s own.
Filling out your multi-member LLC operating agreement is likely one of the first things you’ll need to do when you’re starting your business. Knowing how to properly fill out the operating agreement can help save a lot of time and make it easier to take the next steps and get started.
Step 1: Operating Agreement Basic Information
This first section is simply to outline everyone who will be part of the LLC operating agreement. Since this type of agreement is used when there are two or more managing members there are usually at least three lines for different names.
This section will define who is a ‘member’ for the rest of the LLC operating agreement.
Step 2: Limited Liability Company Information
After you’ve listed all the members of your multi-member LLC, it’s important to define the other details for your company for the operating agreement. You’ll list your LLC’s name, its formation date and time, and the State your company will be registered in.
It’s also important to include the purpose of your company in your LLC operating agreement.
Multi-member LLC operating agreements are also required to list the Registered Agent for your company and your current company offices. That way your business partners, the state, and any other institutions you work with will be able to contact your company when they need to.
Step 3: Capital Contributions
In a multi-member LLC, it’s also important to define who is going to contribute what to the company. Most of the time each member will make a contribution to the operating budget of the company, providing the seed money to help you get going.
The capital contribution section covers how the initial contributions for the multi-member LLC will be handled, as well as allowing for additional contributions in the future, as needed.
Step 4: Allocation of Profits and Losses
This section is mostly just text, but it’s important to make sure you’ve set up a system for distributing profits and sharing the cost of losses, among all the members of your multi-member LLC. Mostly this section needs to cover that the company will operate in a way that’s consistent with legislation about the allocation of profits and losses.
Step 5: Indemnification
The indemnification clause also covers that every member of your LLC who is sued or otherwise faces financial consequences for actions taken on behalf of the LLC will be compensated by the company. This is especially important for a multi-member LLC operating agreement because it helps ensure every member received equal company protection. Since liability protection is one of the main reasons to form a multi-member LLC, it’s important to make sure this clause is included in your LLC operating agreement.
Step 6: Powers and Duties of Managers
This section is usually filled in in its entirety in free LLC operating agreement forms. That’s because the basic duties and powers of managers are similar across all LLCs since it mostly focuses on the operation of the company. This section will also cover the decision-making process for members.
Lastly, this section will usually outline that members are not allowed to leave the LLC except under very specific circumstances. The circumstances of leaving your LLC are outlined in a different section of the multi-member LLC operating agreement.
Step 7: Accounting Management
This section covers both how company expenses will be covered, and how your LLC will track its expenses and income over time. You should have a plan for how you will pay taxes along with other operating costs.
More importantly, this section of the agreement usually requires that each member of a multi-member LLC have their own capital account and other fiscal management details.
Step 8: Transfer of Membership Interest
This section covers how a member can leave an LLC, usually in cases of transferring their membership to someone else. There are several clauses that need to be followed in case one member wants to leave the LLC, including following the rule of the first refusal. However, it’s important to have a way of transferring membership in case of the members in incapacitated or goes bankrupt, or dies. If a member is unable to fulfill their responsibilities or find a replacement member then the LLC may need to be closed and a new one opened without the missing member.
Step 9: Dissolution
Your operating agreement is also required to have a dissolution clause to make sure you can end the LLC if the need ever arises, or it’s purpose has been fulfilled. A good operating agreement template will have the most common reasons for dissolution, including member agreement and intervention by law enforcement agencies, already written in this section.
Of course, your operating agreement can include additional reasons for dissolution if you need them. LLCs will also automatically dissolve if they fall beneath the required member count and a replacement cannot be found within 120 days.
Understanding the terms of dissolution is critical for operating your LLC properly and legally. There are several circumstances in which your original LLC might need to be dissolved and a new one formed, even if you and the remaining members of the LLC would like to continue doing business.
Step 10: General Provisions and Signatures
Once everything has been agreed to, and you’ve verified that the terms of your LLC operating agreement are legal, then all the members of your agreement will need to sign it. Dated signatures are required before your LLC operating agreement can be filed with the state. You’ll also need to have signatures ready before you’ll be able to use your operating agreement for other paperwork and business needs.