The Operating Agreement: Elements, boilerplate template, and optional clauses
What is the Operating Agreement?
An Operating Agreement is a legal document that outlines the ownership, management, and operating procedures of a limited liability company (LLC). It specifies the roles and responsibilities of the members, the distribution of profits and losses, the procedures for decision-making and dispute resolution, and the conditions for the dissolution of the LLC. The Operating Agreement is a crucial document that governs the internal affairs of the LLC and ensures that the members are aware of their rights and obligations.
What are the typical elements of an Operating Agreement?
- Name and Purpose: The name of the LLC and a statement of its purpose.
- Formation and Term: The date of formation of the LLC and the length of its term.
- Membership Interests: The percentage ownership of each member in the LLC, as well as any provisions related to the issuance, transfer, or sale of membership interests.
- Management: The management structure of the LLC, including the roles and responsibilities of members and managers.
- Meetings and Voting: Procedures for holding meetings of members and managers, including voting procedures and requirements for taking action.
- Capital Contributions: The amount and timing of capital contributions required of each member, as well as any provisions related to additional contributions or loans.
- Distributions and Allocations: The timing and method of distributions to members, as well as the allocation of profits and losses among members.
- Transfer of Ownership: Any restrictions on the transfer of membership interests, as well as procedures for the sale or transfer of membership interests.
- Dissolution and Termination: Procedures for the voluntary or involuntary dissolution of the LLC, as well as the distribution of assets upon dissolution.
- Tax Matters: Provisions related to the taxation of the LLC and its members, including any tax elections or allocations.
- Indemnification: Provisions related to indemnification of members and managers for acts or omissions taken in the course of the LLC’s business.
- Amendments: Procedures for amending the Operating Agreement, including any requirements for the approval of members or managers.
These are just some of the key elements that may be included in an Operating Agreement, and the specific provisions included will depend on the unique needs and circumstances of the LLC. It’s always a good idea to consult with a qualified attorney when drafting an Operating Agreement to ensure that it is tailored to your specific needs and complies with applicable laws and regulations.
This boilerplate Operating Agreement template is available at SimpleSignRequest.com
This Operating Agreement (the “Agreement”) is made and entered into on [DATE] by and among the Members of [LLC NAME] (the “LLC”).
- Formation and Purpose.
The LLC was formed on [DATE] for the purpose of [DESCRIBE THE BUSINESS OR PROJECT THAT THE LLC WILL BE ENGAGING IN].
- Membership Interests.
The LLC shall have [NUMBER OF MEMBERS] Members. The initial percentage ownership of each Member is set forth in Exhibit A attached hereto. Membership interests may be transferred or assigned only in accordance with the provisions set forth in this Agreement.
The LLC shall be managed by [MANAGER-MANAGED OR MEMBER-MANAGED]. If the LLC is manager-managed, the Manager shall have [SINGLE OR MULTIPLE MANAGERS] who shall be appointed by the Members. If the LLC is member-managed, the Members shall have equal management rights and responsibilities.
- Meetings and Voting.
The Members shall hold an annual meeting at a time and place designated by the Manager or the Members. Special meetings may be called by the Manager or the Members upon [NOTICE PERIOD] days’ written notice. Each Member shall have one vote on all matters to be decided by the Members.
- Capital Contributions.
The Members shall make capital contributions to the LLC in accordance with the schedule set forth in Exhibit A attached hereto. Additional capital contributions may be required by the Manager or the Members upon [NOTICE PERIOD] days’ written notice.
- Distributions and Allocations.
Profits and losses of the LLC shall be allocated among the Members in accordance with their respective ownership percentages set forth in Exhibit A. Distributions of profits shall be made in accordance with the provisions set forth in Exhibit B attached hereto.
- Transfer of Ownership.
No Member shall sell, transfer, or assign all or any part of its membership interest without the prior written consent of the other Members, which consent may be granted or withheld in their sole and absolute discretion.
- Dissolution and Termination.
The LLC shall be dissolved and its affairs wound up upon the occurrence of any of the events set forth in Exhibit C attached hereto. Upon dissolution, the Members shall receive distributions of the LLC’s assets in accordance with their respective ownership percentages set forth in Exhibit A.
- Tax Matters.
The LLC shall be treated as a partnership for tax purposes, and all items of income, gain, loss, deduction, and credit shall be allocated among the Members in accordance with their respective ownership percentages set forth in Exhibit A.
The LLC shall indemnify each Member and Manager for any losses, claims, damages, or expenses incurred in the ordinary course of business or in connection with the LLC’s affairs, to the fullest extent permitted by law.
This Agreement may be amended only by the written consent of all of the Members.
IN WITNESS WHEREOF, the Members have executed this Agreement as of the date first written above.
[MEMBER 1 SIGNATURE]
[MEMBER 1 NAME]
[MEMBER 2 SIGNATURE]
[MEMBER 2 NAME]
MANAGER (if applicable):
[MANAGER 2 SIGNATURE]
[MANAGER 2 NAME]
What other provision might one need in their Operating Agreement?
Clauses needed for an Operating Agreement might include:
- Purpose and Business Activities
This clause would provide a more detailed description of the LLC’s purpose and the specific business activities that it will undertake. It may also include limitations on the scope of the LLC’s activities or industries in which it may not engage.
- Member Meetings and Voting
This clause would provide additional details regarding member meetings, including the quorum and voting requirements, the procedures for calling and conducting meetings, and the requirements for giving notice of meetings.
If the LLC is manager-managed, this clause would provide more detailed information regarding the powers and duties of the Manager, the process for appointing and removing Managers, and the compensation and reimbursement of expenses for Managers.
- Member Contributions
This clause would provide more detailed information regarding the amount and timing of member contributions, as well as any restrictions on the use of contributed capital.
- Tax and Financial Matters
This clause would provide additional details regarding the allocation of profits and losses, the preparation and distribution of financial statements, the process for making tax elections, and the allocation of tax liabilities among members.
- Dissolution and Termination
This clause would provide more detailed information regarding the process for dissolving the LLC, including the notice requirements, the winding up of the LLC’s affairs, and the distribution of assets to members.
- Dispute Resolution
This clause would provide more detailed information regarding the process for resolving disputes among members or between members and the LLC, including any mediation or arbitration requirements.
- Confidentiality and Non-Disclosure
This clause would provide more detailed information regarding the confidentiality obligations of members and the LLC, including any requirements for protecting trade secrets or other confidential information.
- Non-Compete and Non-Solicitation
This clause would provide more detailed information regarding any restrictions on members’ ability to compete with the LLC or solicit its customers or employees.
- Admission and Withdrawal of Members
This clause would provide more detailed information regarding the process for admitting new members or withdrawing existing members, including any notice requirements, restrictions on transferability of membership interests, and the valuation of membership interests.