Operating Agreements

Operating Agreements


An operating agreement is essentially a partnership agreement used as the governing document for a limited liability company (LLC). Whereas a corporation is a more structured and rigid business entity that is more regulated by state corporate statutes (or bylaws that must comply with such statutes), the regulation of an LLC is delegated in large part to the specific provisions of a written operating agreement prepared for each separate LLC.

State LLC statutes are considered "fall-back" regulations intended to apply, in large part, only in the absence of an operating agreement or a specific operating agreement provision.

While sometimes being described as the counterpart of bylaws in a corporation, a properly prepared operating is much more. It will cover topics such as any requirement for members (owners) to make additional capital contributions, the transferability of membership interests, any right of first refusal to purchase a membership interest, how the value of a membership interest will be determined, the payment terms, and much more. None of these topics are covered in corporation bylaws. A separate corporation buy–sell agreement would be required.

LLCs are either member-managed or manager-managed and an operating agreement must be prepared for your specific management structure.

As a stand alone service, we prepare only fully customized, comprehensive, and extremely detailed operating agreements for both management structures. Our questionnaire walks you through a list of all common topics covered by an operating agreement that is suitable for an LLC that is closely held and is managed similar to a small general or limited partnership.

Our questionnaire will allow you to specify duties and responsibilities and powers for members and managers that relate to your particular business operations as well as customizing many other provisions to apply to your business.

Once you have submitted a completed questionnaire with payment, we will prepare a draft operating agreement and send it to you for review and comment. We will make any necessary changes or corrections until you are satisfied that the operating agreement meets your requirements.

If you have a business with a large number of members or managers, conduct certain type of real estate operations with complex tax considerations, or have other unique factors, we advise you to seek professional advice from an attorney and/or tax accountant prior to, or instead of, using our operating agreement service. Your payment for our operating agreement service and use of the operating agreement we prepare for you will be considered your representation that such advice from an attorney and/or tax advisor has either been obtained or was unnecessary and that you have determined that the operating agreement is acceptable for your specific business.

You may complete the online questionnaire without any obligation for payment. If you wish to proceed after completing the questionnaire, you may proceed to pay at that time or login as a user at a later time to retrieve your questionnaire and complete it, if unfinished, or simply provide payment at that time.

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Does an operating agreement have to be in writing?

Each state determines whether an operating agreement must be in writing, or whether it is a requirement for an LLC to have an operating agreement. Most states require an operating agreement, though many provide that it may be verbal. Even though your state's laws may not require a written operating agreement, a bank, vendor, landlord, escrow company, or other third party may require one because it is the only governing document specifically for your particular business.

Do I need an operating agreement if the only members are my spouse and I?

You wouldn't normally prepare an operating agreement for the two of you any more than you would prepare a partnership agreement for the two of you. That said, a third party may still require a written operating agreement because it's likely the only document that will indicate who the members are and what authority and rights they have to act on behalf of the LLC.

If you are a husband and wife LLC, single member LLC, or blood relatives that would normally not have a written agreement between you, but still must provide an operating agreement to a third party, a simple, or short form, operating will often be sufficient. We don't prepare short form agreements as a stand alone service.

What happens if my LLC doesn't have an operating agreement?

Without an operating agreement to service as a governing document, your LLC will be regulated by the LLC Act or your state. For a single member LLC or husband and wife, this shouldn't be an issue. For a member-managed LLC with multiple members who need an operating agreement crafted for their particular business arrangement, the LLC statutes in all states will fall far short. They don't cover many essential subjects and the ones they do cover may not dictate an outcome that the members would have chosen for themselves.

What types of subjects are not covered by typical LLC state statutes?

Some of the more important subjects that are either not addressed at all or have very basic or minimal provisions include:

  • Requirements for members to contribute additional capital if needed for the LLC business;
  • Preferred or disproportionate distributions of profits or losses to members;
  • Special provisions for restricting the transfer of membership interests based on specific conditions being satisfied, approvals being obtained, or exemptions for permitted transfers of interests to a member's family member, trust, or affiliated entity;
  • Methods for valuing the interest of a member who has the right to sell his membership interest;
  • Alternatives for how an agreed purchase price will be paid to a selling member;
  • Procedures for dispute resolution among the members other than litigation, such as mediation or arbitration;
  • Any special duties and responsibilities that would be assigned to a member or manager
  • Any specific powers or rights that would be vested in a member or manager.

Is the operating agreement your service provides any different or better than other incorporation services or forms that I can use?

Yes, but of course we're biased. If you check the "leading" online incorporation services, you'll learn one of two things: (1) they only provide a preprinted sample agreement or a forms CD for you to edit yourself, or (2) they provide a very simplified and partially "customized" operating agreement.

We use "customized" in quotes because this description could technically be used if all the online service did was insert your LLC name and formation state in its form operating agreement.

Here's our challenge: find another online service that offers any customized operating agreement, then go through any online questionnaire on their website, find out who's preparing the agreement for you, and then compare what you find to what we're offering. We're confident you'll conclude that no one prepares an agreement with our level of customization because their questionnaire simply doesn't elicit enough information to do so, and no other service is providing an agreement prepared by an attorney.

What happens if there are changes in my members or other matters covered by my agreement?

An operating agreement, like most agreements, reflects circumstances that exist when it is prepared and those are can be expected to occur. When a provision needs to be changed, an amendment must be prepared and signed by the members. We retain your original final agreement and can prepare all amendments that may be required in the future.

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