How to Draft an LLC Agreement

By Jennifer Kiesewetter, J.D.

How to Draft an LLC Agreement

By Jennifer Kiesewetter, J.D.

The LLC agreement, or the operating agreement, expresses in writing the formal agreement of the operation of the LLC. State law governs the creation, management, and operations of this type of entity.

Business people sitting around a table signing paperwork

The core elements of this type of agreement address several issues, such as equity structure, management, voting rights, transfer of membership rights, dissolution, and dispute resolution. Before drafting it, be sure to check your state law to know what provisions to include.

Here's how to draft an LLC agreement:

1. Identify ownership interests.

The LLC agreement addresses an LLC member's ownership interest in the company, typically through a percentage of ownership. Membership interests contain two elements: economic interests and management interests. An economic interest represents ownership in the company, and a management interest governs an LLC members' voting and other management rights.

An LLC agreement identifies how much each member should contribute to the LLC, creating capital accounts. Additionally, members should describe the method of distribution of profits and losses to each member.

2. Determine the day-to-day operations.

Members should set forth how the LLC is managed on a day-to-day basis in the agreement. You can choose to have your LLC operated by the members or by named managers of the LLC, which can comprise of members or non-members. Finally, the contract should specify when management meetings occur, the duties and responsibilities of each member or manager, and the procedures for the addition or removal of a member or manager.

3. Establish voting rights.

When drafting an LLC agreement, you should address voting rights and limitations. For each member or a class of members, you can limit or expand voting rights. For example, you could base voting rights on contributions to the LLC or provided management duties. Additionally, certain classes of members may vote on management or general LLC issues whereas other members may have the right to veto specific actions.

4. Define member's entry or exit from the LLC.

For LLCs, you should decide when new members can join and when members can exit the LLC, such as upon death or disability. The LLC agreement should address how much capital new members should contribute to the company and what management rights they have. Additionally, the LLC agreement should address an exiting member's ownership interest. For example, you should decide if another member or a family member of the exiting member can purchase the interest or if the company should have a right of first refusal to purchase the ownership interest. The agreement should address any restrictions on the transfer of ownership.

5. Outline dissolution requirements.

Finally, when drafting an LLC agreement, you should decide how and when the company will dissolve. For example, the agreement identifies which events will trigger a dissolution, such as bankruptcy or merger. Finally, it should address the liquidation of assets upon dissolution and any other requirements for winding up the company.

In addition to the above provisions, you should include general provisions such as notices, books and records, and dispute settlement options (i.e., mediation or arbitration). Defining the ownership, management, and operations of your LLC should comply with your state law's requirements. Make sure that you include all required provisions. When you're setting up your LLC, including drafting your LLC agreement, you should consult with an attorney or use an online service provider for assistance or guidance. By seeking legal help, you can ensure that your LLC is formed properly.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.

Ready to start your LLC?

Start an LLC online now