How to Draft an LLC Agreement

By David Carnes

State law regulates the operations of limited liability companies, or LLCs, far more loosely than it regulates corporate operations. In addition, no state requires an LLC to create an operating agreement. If a dispute arises among members of an LLC with no operating agreement, relatively few state law default rules exist for LLCs to rely on as standards to resolve disputes. For this reason, it is important for an LLC to create a comprehensive LLC operating agreement and have it signed by each member.

State law regulates the operations of limited liability companies, or LLCs, far more loosely than it regulates corporate operations. In addition, no state requires an LLC to create an operating agreement. If a dispute arises among members of an LLC with no operating agreement, relatively few state law default rules exist for LLCs to rely on as standards to resolve disputes. For this reason, it is important for an LLC to create a comprehensive LLC operating agreement and have it signed by each member.

Step 1

Research the LLC laws of the state in which the LLC is being formed. Pay particular attention to restrictions on the operation and structure of the LLC so that the operating agreement will not contradict these restrictions. Also pay attention to state default rules that apply to a particular issue if the operating agreement does not address it. For example, some states' default rules require that each member be granted an equal ownership interest regardless of relative capital contributions, unless the operating agreement provides otherwise.

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Step 2

List all of the information about the LLC that appears in its articles of organization, such as the names of the members, the name and address of the registered agent, and the LLC's principal place of business.

Step 3

State the purpose and duration of the LLC. Most states allow LLCs to be of perpetual duration and to engage in any lawful activity. If LLCs in your state may engage in any lawful activity, do not limit the LLC's flexibility by stating its purpose more narrowly, unless you have a particular reason to do so.

Step 4

Add a section that sets policies for the departure and addition of members, the death or disability of a member, and the purchase and sale of member shares. For example, clarify whether a member can unilaterally sell his shares in the LLC, or whether the approval of other members is required.

Step 5

Insert a provision setting forth each member's capital contributions, ownership percentage, and share of LLC profits and losses. In many states, an LLC has broad freedom to ignore relative capital contributions when allocating profits and losses.

Step 6

Include a management section dealing with procedures for decision making, voting rights, and rules for meetings and voting. Determine who will manage the LLC. Some LLCs are managed by members, and some are managed by nonmembers. Many states require that at least one manager be a member.

Step 7

Insert a provision setting out procedures for dissolution of the LLC. You may require a majority vote of shares to authorize dissolution, or you may require unanimous consent. Many states prohibit a unanimous consent requirement, however.

Step 8

Obtain a copy of an operating agreement for another LLC formed in your state, or a sample LLC operating agreement for your state. Compare it with your draft operating agreement to see if you missed any important issues or drafted it in a manner inconsistent with state law.

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What Is an LLC Agreement?

References

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LLC Contract Information

Limited liability companies, or LLCs, are governed by state legislation. As of 2010, many states did not require LLCs to create operating agreements. Even when an operating agreement is not required, however, it can help prevent disputes from arising, and can help to resolve them when they do arise. An operating agreement can also prevent state default rules from deciding the terms of the relationships among the members.

Where to File an LLC Operating Agreement

An LLC, or limited liability company, has the option to create an operating agreement, a document that states how and by whom the company is to be managed. All LLCs must file an Article of Organization, a legal document incorporating the business in a specific state, but no states require that operating agreements be filed. In fact, most states have very few laws regarding the creation and documentation of an LLC operating agreement.

LLC Components

When evaluating what type of organizational form to choose for your business, one option for you to consider is a limited liability company. An LLC is composed of a pool of owners, or members, who are registered with a state to participate in a business. Since an LLC operates under state law, how the organization is regulated varies based on where the business is located. Prior to choosing an LLC, it is important to evaluate the major components of the organizational form and consider whether it is right for your business.

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