Though not all states require an operating agreement and none require you to file it, this document may be the most important one for your limited liability company. The operating agreement governs the relationships among each of the LLC’s members. Even in a partnership between good friends, an LLC should have a detailed operating agreement in the event of unforeseen disputes.
Consider the questions in this checklist and ensure that there is a provision in your operating agreement answering each one.
- What state law will govern the LLC?
- What is the LLC’s primary purpose?
- Is the LLC fixed in duration/term or do you plan for it exist indefinitely?
- Will your LLC be member-managed or manager-managed?
- How may the operating agreement be amended?
- How will disputes between members be settled?
- What are the initial capital — financial — contributions of each member?
- Will future members be required to make initial capital contributions?
- May members withdraw capital contributions and under what circumstances?
- Do certain members have priority over others for financial distributions?
- What is each member’s share of any financial distribution?
- What is each member’s share of any tax allocation?
- What reimbursements are members entitled to?
- What are the management powers of each member?
- What, if any, actions require the consent of all members?
- Are there any limitations on members regarding management of other entities?
- Will the LLC indemnify (offer to pay debts for) members when the member acts within the scope of his powers under the operating agreement?
- When and how will members be liable to other members for his acts or omissions?
- What books will be kept and by whom?
- Who will have the right to access LLC books and records?
- What reports will members automatically receive and at what time?
- Who is obligated to submit financial reports to the state and IRS?
- What are each member’s voting rights?
- What are the vote requirements for certain decisions (i.e. majority or unanimous consent)?
- What actions can each member take without seeking other members’ approval?
- How many members must be present before a vote may be taken?
- Where and how frequently will meetings be held?
- How will members be notified of meetings?
- How many members must be present for a quorum?
- May members attend meetings or vote by proxy?
Assignment and Transferability of Interest
- May members sell, assign, or otherwise transfer their interest in the LLC to another person with or without the consent of the other members?
- What rights, if any, does the recipient of the transfer have?
- When might assignments be permitted or prohibited?
- How will members be replaced in the event of death, incompetency, separation, or termination?
- When and how may a member voluntarily withdraw from the LLC?
- When and how may a member be involuntarily removed from the LLC?
- What happens to the former member’s interest in the LLC when he is no longer a member?
- When and how may the LLC be dissolved?
- How will distributions be made to members when the LLC is dissolved?