How to create an LLC operating agreement [+ Free Templates]

An LLC operating agreement, which is a binding contract between members, describes how profits and losses will be shared. It also identifies whether the LLC is managed by a member or a manager. It is used to settle disputes between members, define responsibilities, and much more. Although operating agreements are not required by law, an attorney or legal services can draft one for you to include in your filings.

Rocket Lawyer can be an alternative to hiring an attorney for legal advice regarding your LLC. Rocket Lawyer is a great way to save on attorney fees. Rocket Lawyer offers operating agreement templates, document review, and consultations starting at $39.99 per month. Get it for free for 7 days.

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Free Templates for LLC Operating Agreements

 

This template provides eight articles that provide all the information you need to outline the LLC’s ownership rights and obligations. The important sections cover your company’s management, tax structure, dispute resolution terms, and other information that will guide your company’s operation. These free LLC operating agreements templates will help you clarify your LLC’s structure and allow you to retain control of LLC management, taxation and profit sharing.

  • Single-member LLC Operating Agreement ( .DOCX , Google Document). The most common structure for a single member LLC is member-managed. However, you can also use the single-member template to create a manager-managed structure.
  • Multi-member LLC Operating Agreement ( .DOCX , Google Doc),: This template is for companies with multiple owners. If your company is managed by a group or third-party manager, you can use the manager-managed language. Otherwise, you can use the member-managed language.

These templates are great for formalizing your LLC’s management structure, but you don’t need to use a lawyer. An LLC operating agreement from Rocket Lawyer may be more appropriate for you if you have a complex company or need to make sure you are following state-specific laws. Access to operating agreement templates, review documents and consultations is $39.99 per month.

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Identify your members

LLC members are people who have a legal ownership interest of your company. An LLC can have one or more members. This distinction will affect the structure of your LLC operating agreements. Make sure you identify your LLC’s members in your Articles of Organization that you file with your state.

LLCs with one member

An LLC with a single member is one that has 100 percent ownership. Operating agreements can be very helpful in avoiding disputes among multiple members. However, an agreement can also provide benefits for a single member LLC by overriding the state default rules regarding how the LLC will operate in the absence of one. If you default, you will have to follow state-specific default rules for management and member authority.

An operating agreement will not only prevent the uncertainty that default rules can create, but it will also help you to secure your limited liability status by seperating your LLC from yourself as an individual. An LLC’s hallmark is that the members of the LLC are not personally responsible for any company debts or obligations. Your LLC could look more like a sole proprietorship without an operating agreement than a company with limited liability.

If your company has only one member, you can use our single member template. In the template, you will indicate whether your LLC is managed or not by you. Select the language template that best fits your LLC’s structure.

Multi-member LLCs

Multi-member LLCs find operating agreements most useful because they establish the ownership, management, and voting structure for your company. Operating agreements are legally binding and reduce the risk of disputes between members. They establish each member’s authority, clarify voting rights, share profits and outline what happens if one member leaves the company.

To avoid any disputes among members of your multi-member LLC, and to ensure a quick resolution should one arise, we recommend that you have an operating agreement. Establish the capital contributions for each member, determine voting rights, and specify what happens if a member quits the company.

If your LLC has more than one member, you can use our multimember template. Multi-member LLCs are those that have multiple owners. In the template, you will indicate whether your LLC is managed or not by any member. Select the language template that best fits your LLC’s structure.

Screenshot of the Intro to an LLC Operating Agreement Template

You can find more information in our article describing LLCs, and how to file one. You can organize your LLC by following our guide to filing an LLC with the secretary of state.

The content and format of your LLC operating agreements will depend on whether you have a single or multi-member LLC. Multi-member LLCs can be more complex and will require sections on dispute resolution, voting rights, and other details. Rocket Lawyer’s team can assist you in drafting an operating agreement if you are forming an LLC.

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2. Article I: Summarize Important Company Data

After you have established your ownership and management structure, organize your LLC’s details. Article I describes your LLC. Include your name, primary address, and registered agent. To properly identify your company, include specific details in Article I.

These are important terms that you should include in the Article I of your Operating Agreement:

  • Name of LLC: Enter the exact name that was used by the secretary-of-state’s office to identify the LLC.
  • Registered agent – Provide the name and information of the person/business you chose to act as your registered agent for the formation of your LLC. For help in choosing the right registered agent, see our guide.
  • Primary address and state of formation : The filing state of your LLC will determine whether or not you must file an operating agreement with the secretary-general’s office.
  • Term Allow members to dissolve the LLC at any time. This allows for flexibility. Multi-member LLCs can be limited in terms of when they can dissolve the company. This is possible by specifying conditions such as a vote by majority members or events that render the business illegal.
  • Continuance. This means that, if at least one member is still in the company, they can continue to run the business.
  • Purpose Include an explanation of your purpose in your operating contract. This statement may be broad or narrow depending on where you live, but it should still be consistent with your Articles of Organization.
  • Your principal place of business is the address where your LLC will be based. Some states require that your primary business location be within the boundaries of the state where you are filing. Check your secretary of state’s website to find out local requirements.
  • Member names: Members represent the owners of your company. To begin the draft of your operating agreement, identify one or more members.
  • How do I add members? This section describes how new members can be added to your company. You might, for example, specify that new members cannot be added to the company without the written consent of all existing members.

Screenshot of Article I of the LLC Operating Agreement Template

Screenshot of Article I of the LLC Operating Agreement Template

4. Article II: Detail Capital Contributions

Initial contributions refer to any cash or property that each member contributes at the time of the LLC’s formation. Each member’s contribution should be recorded in the operating agreement. If applicable, indicate their share of ownership in the company. In general, you should describe the total contributions and attach the exhibit.

Screenshot of Article II of the LLC Operating Agreement Template

In general, initial contributions are made in exchange for a share of the company’s ownership. A capital interest is a contribution in exchange of ownership. It is usually equal to the member’s share of the company. This section of the operating agreement should include details about the allocation of the contribution as well as the total amount contributed by each member.

Screenshot of Exhibit 2: LLC Operating Agreement Template

5. Article III: How profits and losses are shared

Article III outlines how profits and losses are shared between members. In general, the profit allocation for multi-member LLCs is determined by each member’s ownership percentage. This can be found in Exhibit 1 to your operating agreement. Operating agreements allow you to adjust percentages and decide when profits will be distributed.

Designate Profits and Losses

Profits and losses refer to the amount of money raised or lost by a company in any given year. These amounts can be divided between LLC members depending upon their ownership interests or other factors specified in your operating agreement. In case of any questions about financial responsibility, make sure to document how profits and losses are shared in your operating contract.

You will receive 100% of the profits as the sole member of an LLC. However, you will bear 100% of the losses. It’s important to clearly outline the share of profits and losses when you have a multi-member LLC. Name all members and indicate their shares of the profits and losses. This will ensure that everyone is equal to 100 percent. The percentages are generally proportional to each member’s ownership in the LLC. However, you can specify any number if your members agree.

Describe Distributions

LLC members do not receive a salary in return for the work they do. They receive distributions that are based on the company’s profits and losses. To determine whether your LLC members will be receiving distributions quarterly, annually, or at a different frequency that is most appropriate for your company, consult your operating agreement.

You can keep a flexible distribution plan by including language in Article III of the operating agreement indicating that funds should be allocated annually, or more frequently as members choose. To ensure that your distribution schedule is compliant with IRS regulations, a tax attorney or certified public accountant should review it.

Select a tax structure

The default LLC tax structure is a sole proprietorship, partnership. You can, however, change your tax structure to one of a C-corporation or S-corporation by filing with IRS. No matter if you have an LLC already registered with the state, or if you plan to do so in the future. Include the relevant language in Article III in your operating agreement.

The following are the most common ways that an LLC could be taxed:

  • Sole proprietorship/partnership taxation: By default, LLCs are taxed as sole proprietorships or partnerships, depending on the number of members. LLCs do not pay taxes as profits are reported on the individual tax returns of their members. You don’t have to include specific language in Article 3 of your operating agreement if you want to keep the default taxation structure for LLCs.
  • Corporate taxation : Corporations pay twice taxes: once on net corporate profits and again on dividends that are part of the members’ personal tax returns. There are distinct advantages to electing for your LLC’s tax status to be either an S corporation or a C corporation. If your members have business responsibilities which aren’t related to their ownership shares, you might consider corporate taxation. To help you decide which option is best for your LLC, check out this comparison of LLCs and S corps.

To allow yourself the option of having your LLC taxed as an entity in the future, add language to Article III to your operating agreement. This can be done by declaring that any member may at any time elect to be treated like a C-corporation.

There are many differences in LLC tax structures. It is important to consult a tax professional before you make any decisions. To determine the best tax structure, consult our LLC taxation guide for small businesses.

Screenshot of Article III of the LLC Operating Agreement Template

Your company’s finances will be affected if you choose the right tax structure and distribution method for your LLC. To help you make the right financial decisions regarding your LLC, we recommend that you hire a tax professional or attorney. Rocket Lawyer’s monthly subscription plan allows you to save money on CPA or hourly attorney fees and allow you to consult with one their On-Call attorneys.

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6. Article IV: Select a Management Structure

Management-related language is mostly found in Article IV of the operating agreement. It all depends on how your LLC has been managed. Member-managed LLCs allow all members to make decisions. Manager-managed LLCs limit management to members or a third party manager. In Article IV of your operating contract, include language that reflects your management structure.

These are the two management structures for LLCs:

Member-managed LLC

Each member of a member-managed LLC has the authority to bind it. This structure allows all members to open bank accounts, sign contracts, and take other decisions that will bind the company. This structure is best if all members of your LLC are comfortable participating in the management of the company’s day-to-day operations.

Article IV will only be applicable to a single-member LLC. This section should outline the powers of the member, the management authority of the LLC and the ability to create bank accounts, sign contracts and otherwise bind it. Include language confirming that the member is exempt from liability as per applicable law. Include boilerplate language as detailed below for administrative matters.

Multi-member managed LLCs should have terms in their management section that outline member duties, dispute resolution and accommodations for members who sell or transfer their shares.

These terms should be included if you select a member-managed structure with multiple members.

  • Management of the business . State that the management of the company is in the hands of its members. Explain that each member will appoint one chief executives member, who will be responsible for all aspects of the business’ operations.
  • Members Limit the liability of members and state that members can take part in the management, direction, control or operation of company affairs. They also have the power to bind company through contracts and other obligations.
  • Members’ duties: This section doesn’t detail the members’ duties. It should instead state that every member should have duties, and explain what happens if they don’t.
  • Chief Executive Member: The chief executive member has primary responsibility for the management of your company’s operations and making decisions for the members. If you are a sole-member LLC, this section is not required.

Manager-managed LLC

Only designated officers and managers can bind an LLC managed by a manager. Managers can be either a group of members who have management authority or a third party hired to manage the LLC. This is a good option if you want to limit your management authority to your members, or if your company will benefit from a manager who is not a member.

The manager-managed structure works best for larger businesses, while single-member LLCs are better suited for member-management. If you have a retail company or any other business that requires the hiring of store managers, it might be a good idea to create a single-member manager-managed LLC. The management structure that is best suited for your business will depend on its needs.

The management section of an operating agreement that is manager-managed will not depend on the number of owners if you choose to use this arrangement. The operating agreement should instead include a section that outlines the duties of the manager.

These terms should be included before you select a manager-managed structure.

  • Management of a business: Indicate that the LLC is managed by a manager and that they are listed in the Articles of Organization that you filed with the secretary of State when you formed your LLC. Include information about how managers will be chosen. You can, for example, decide that members who hold a majority of the capital interest in the LLC are eligible to elect managers.
  • Members : This section should say that members are not allowed to participate in the management of your company’s affairs, unless they have been elected managers.

Screenshot of Article IV of the LLC Operating Agreement Template

Screenshot of Article IV of the LLC Operating Agreement Template

The most important part of setting up a business is choosing a management structure. The content of your LLC operating agreements will be influenced by the management structure you choose. Rocket Lawyer’s national team of On Call lawyers can help you select a management structure for your LLC and create an operating agreement.

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Additional Management Sections

No matter what management structure you have, there are specific language that you need to include in Article IV. This will protect your LLC and its members against third-party legal actions, bankruptcy, or regulatory action. In Article IV of an operating agreement, you should include language about indemnification, recordkeeping requirements, and who can access the company records if you have a multimember LLC.

You can also include the following sections in your operating agreement:

  • Disputes between members: This section should declare that members can dispute each other by majority vote. This is only necessary if your LLC has multiple members.
  • Powers This section describes the rights and responsibilities of member-managers and manager-managers of LLCs. In this section, you will need to detail whether managers/members have the power to enter into contracts, purchase property, borrow money, or otherwise bind the company. This is only necessary if your LLC has multiple members.
  • Nominee – A nominee is a third party public representative of an LLC. This allows the LLC to have property without it becoming public. This section stipulates that the LLC should hold title to company assets in its name or the name of a nominee such as an attorney or title company.
  • Company information All books, records, and materials relating to the activities of an LLC should be available to members. This section describes the rights of members to inspect, copy and access these records. It is located in Article IV of your operating contract.
  • Exculpation: An exulpation clause releases an LLC’s members and managers from any liability for damages caused by actions taken with good faith and in the best interest of the company.
  • Indemnification This section states that the LLC will pay members and third parties who act on behalf of the company any harm, liability, or losses resulting from their good faith actions in relation to the company.
  • Records – Keep copies of member names, certificates of formation, operating agreements, and financial records. Refer IRS regulations to find out how long records should be kept and the time period to include in Article IV.

It can be difficult to decide the right management structure for your LLC. It is a good idea to hire an attorney to help organize your company. Rocket Lawyer’s membership is $39.99 per month. Their network of On-Call attorneys can help you navigate the process.

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7. Article V: Identify your Officers

Officers are not required for an LLC. You can give structure to your LLC by giving it titles and describing the scope of work. To identify who will be leading your LLC’s members or employees, refer to Article V in your operating agreement.

Screenshot of Article V of the LLC Operating Agreement Template

If you have officers, include the following language in your LLC Operating Agreement

  • President The president of your LLC should be a manager and will be responsible to oversee the operations at the highest level of the LLC.
  • Chief Financial Officer: The chief financial officer of your LLC will maintain and keep books and records of all accounts, including receipts, losses, assets, liabilities, and receipts.
  • Vice President: An owner, manager or employee can act as a vice president and oversee the operation of a department in your company, such as finance or sales.
  • Secretary A secretary for an LLC is responsible for preparing and filing annual reports and taking minutes at meetings.

Screenshot of Article V of the LLC Operating Agreement Template

Add sections to Article V that describe each role. They should include information about the general duties of officers, their decision-making authority, compensation, and how the LLC will fill any open positions. A separate exhibit should be attached to the operating agreement. It should list the names and roles for each officer at the time of execution.

Screenshot of Exhibit 3: LLC Operating Agreement Template

8. Article VI: Define the Compensation Structure

The compensation structure of an LLC determines how managers will be paid, and how members may draw against their ownership interests. To limit the time a member can take draws, and to determine how managers will be paid for their services, use Article VI in your operating agreement. While you don’t need to limit member draws, it is important that you provide information about manager compensation.

Management Fee

LLC managers typically get reimbursed for any out-of-pocket expenses incurred in managing the LLC and are compensated for their time performing management duties. You can control the compensation of LLC managers by including language in Article VI. This will limit reimbursements and compensate them according to the value of their management services.

Member Compensation

LLC members do not receive compensation for their work. Instead, they have a capital account. They can also choose to receive distributions or a “draw” from their capital account. Your operating agreement should contain language that explains when and how draws can be made.

Screenshot of Article VI of the LLC Operating Agreement Template

9. Article VII: Describe Bookkeeping Practices

To meet federal and state tax requirements, your LLC must keep detailed financial records. Multi-member LLCs will need to keep detailed financial records. These records should include capital contributions and member accounts. Select a fiscal year, and refer to Article VII of your operating contract for details on how to prepare and keep your books and track member account.

Keep the Company’s books.

The books of an LLC are used to keep track of the company’s day and prepare financial statements. To track income expenses, loans, and other debts, keep complete records in the company’s ledger. To require managers and members to keep accurate records, include general language in the operating agreement.

Follow Member Accounts

Keep a record of distributions and capital accounts. Federal regulations dictate the bookkeeping requirements for member accounts. Refer to these regulations to make sure you include all necessary details in your operating agreements. These terms are important to ensure your LLC meets all tax requirements. They also prepare you for the eventual sale of your LLC.

Prepare annual reports

Your LLC must prepare statements for each member’s share in profits and losses after the end of each fiscal year and provide these to their individual tax returns. To ensure that your managers and members are fully aware of these reporting requirements, include a section in your operating agreement.

Your fiscal year should be defined

An LLC’s fiscal calendar year is twelve consecutive months that end on the last day in any given month. This is different from a regular calendar year. This date is used to determine the end of your year for accounting purposes. You can choose a fiscal year that suits you best, but this timeline must be followed every year. It can be hard to change.

Screenshot of Article VII of the LLC Operating Agreement Template

10. Article VIII: Establish Transfer Procedures

Your operating agreement should contain procedures for the transfer of shares in the event of a member buyout, or company dissolution. Members sell their ownership shares in buyouts, while dissolution is when an LLC ceases to exist. You can control how your membership shares are treated by writing procedures into your agreement.

To describe how shares are to be transferred from exiting members, how exiting members’ interests will be valued and how member interest will be distributed and refunded, use Article VIII. Although much of this language is redundant, it is important to explain how exiting members will be able to purchase the interest of an exiting member and what happens to former members’ debts after dissolution.

Screenshot of Article VIII of the LLC Operating Agreement Template

11. 11.

Every member of the LLC must sign an operating agreement to make it binding between them. After signing, each member of your LLC must sign it. Keep a copy for each manager and member. For any specific filing or recordkeeping requirements, always consult your secretary-of-state.

Screenshot of LLC Operating Agreement Template Certificate Of Formation

It can be complicated to draft and execute an LLC operating agreement. Rocket Lawyer’s on Call network of lawyers can assist you in drafting an agreement for your business.

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How an LLC Operating Agreement Works

An operating agreement is a legal document between members of the LLC and between managers and members. Operating agreements give stability to LLCs, formalizing ownership shares, profits-sharing and voting rights, as well as other aspects of the business. It becomes a legally binding agreement that outlines the company’s operations once it has been signed by all members.

Your LLC will survive any disputes or member departures. It is important to define the terms of your company’s operating. Companies can avoid default rules that states impose on them if they have an LLC operating agreement. Make sure you include all relevant information so that you can easily find it if there is a problem.

Who is it right for?

Operating agreements are the best option for multi-member LLCs and LLCs with employees, unless there is a state requirement. If you do not have an operating agreement, your LLC could be subject to state default laws. We recommend that all LLCs have one. While it is best to have an attorney assist you with legal documents, you can save money by using our templates for a simple LLC operating arrangement.

While states don’t require LLCs file operating agreements with the state in writing, some states require them to have one. Even if the state does not require it, an operating agreement is a great way to formalize your LLC’s operations. To determine if an operating agreement is required, check with your secretary-of-state.

Brett Trembly, Trembly Law Firm “Business conflicts are part of the business. You deal with them. A business’s collapse from the middle is what tears it apart. An operating agreement can be a shield against another member ruining your business by causing conflict over major decisions or profit sharing arrangements.

The pros and cons of using an Operating Agreement

An operating agreement is a legal document that you must have for your LLC. There are pros and con’s to this arrangement. You don’t have to file an operating agreement in every state. Decide whether it is worth the extra costs. Execute an operating agreement if you have the resources and time to do so. This will formalize key elements of your business and prevent state-specific default rules.

The benefits of using an Operating Agreement

There are many benefits to using an operating agreement:

  • Avoid management disputes It is important to clearly define voting rights when an LLC has more members or a Manager. You can achieve this by including the voting rights and authority of the manager in an operating agreement.
  • Avoid default state law: Each state has default laws that govern how LLCs function in the absence an operating agreement. To avoid default laws and all the uncertainty they bring, you can file an operating agreement.
  • Quickly resolve conflicts: Operating Agreements are a great way for you to set up your preferred method of dispute resolution. Identify the way you would like to resolve intercompany disputes, and then include the terms of the agreement.
  • Be prepared for dissolution. If a member leaves the LLC or dies, you will need to reallocate ownership percentages. To prevent an unintentional dissolution of the LLC, you will need to detail how this will be done within your operating agreement.

Cons of using an Operating Agreement

There are some cons to using an operating agreement:

  • It can be costly to draft An attorney may be required to draft an operating contract. Use one of our free LLC operating agreements templates to avoid these extra costs and give structure to your business.
  • Time-consuming Creating an operating agreement is time-consuming. Before any issues arise, you need to think about how you want certain business decisions made. This can be time-consuming and require energy that you might not have had when you first formed your LLC.
  • Restrictive – Depending on what terms you include in the LLC’s operating agreements, you might find that you are unable to operate efficiently if you don’t comply with certain requirements.

Example of an Operating Agreement for LLC

An LLC operating agreement’s format and content will vary depending on the LLC structure or state. To ensure that your agreement is clear and comprehensive, you should check with the state’s requirements. To create an LLC operating agreement that suits your needs, you can use our easy templates.

Sample Operating Agreement for a Single-member LLC

Operating agreements for single-member LLCs serve to seperate the LLC member and protect them from liability. They also supersede state default laws. These agreements are a great way to define the duties and pay of a third party manager. This template can be used for a single-member LLC. You can then choose the appropriate language for your management structure.

Below is a simple operating agreement for a single member LLC.

Screenshot of the Operating Agreement for a Single-Member LLC