How to Write an Operating Agreement

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If you have recently formed an LLC for your business or you are planning to do this in the near future, you should draft an operating agreement. In some states it is required by law but even if it isn’t, there is good reason to do this.

First, most states have default rules that take effect to govern any disputes should litigation be filed. If, for example, you don’t have an established operating agreement, profits may be automatically split between the stakeholders in the agreement even if the majority of money invested came from you. The other compelling reason to write an operating agreement is to take advantage of the limited liability protection that comes with incorporation.

Your operating agreement should have the following parts in it:

Who owns the company? Include a breakdown of the people who have an ownership stake in the company including the percentage of the company they own.

What do they do? What are the roles and responsibilities of each of the stakeholders in the company and what are their rights in the company? Use this section to draft detailed plans of the stakeholders’ relationship with the company.

Money Distribution- How will profits and losses be distributed to the stakeholders? These plans should be as detailed as possible since the monetary details of any business are the sections most likely to be contested in court. Think about how the stakeholders will be paid? Will they begin taking a paycheck at the very beginning or will the profits initially be reinvested? Define the difference between collecting a wage and getting a return on their original investments, called their distributive share. When can they take their distributive share and how much at any one time?

Voting Rights- What are the rules regarding the decision making process with the stakeholders? Do all stakeholders have the same voting rights or is it based on the percentage of ownership? Do all members have to be present to vote or could it be a simple majority?

Ownership Transfers– How will your LLC handle transitions of ownership? Most operating agreements handle different types of events in different ways. If one of the owners should pass away, that is handled differently than one who wishes to sell their stake in the company. Often there is a process of share buyout but the operating agreement should define these events and address each one.

Do I need Professional Help?

For a small company with very few stakeholders and very little capital, an operating agreement can often be written in house or ordered through a business incorporation company, but for companies with a more complicated structure, consider gaining the help of a professional with experience in this area. Templates of LLC Operating Agreements are part of what is called a “Corporate Kit”. The Virtual Corporate Kit offered at no charge by to its customers can be a valuable tool to help you with your compliance duties.