Delaware LLC Operating Agreements: Complete Guide
If you are thinking about forming a Delaware LLC, it’s important to understand what an LLC Operating Agreement is and how it can help protect your business.
What is a Delaware LLC Operating Agreement?
A Delaware LLC Operating Agreement is a vital document that outlines how an LLC is organized and sets the foundation for the business. The LLC Operating Agreement establishes:
- Who the LLC members are;
- What rights the LLC members have; and,
- How decisions are made in the LLC.
The LLC Operating Agreement sets up the ownership, management structure, and operating procedures for the LLC. Delaware LLC members should keep a written and signed copy of the Operating Agreement with the company’s other important documents.
The Delaware LLC Operating Agreement is a private company document. Delaware does not require LLCs to file the Operating Agreement with the Secretary of State’s office or any other agency.
What Should a Delaware LLC Operating Agreement Include?
A Delaware LLC Operating Agreement sets the legal foundation for an LLC and is essential to avoiding conflicts between business partners. The following provisions should be included in every LLC Operating Agreement to protect both LLC members and the business:
- LLC Ownership – Clearly define who the LLC members are and specify each member’s ownership interest.
- Voting Rights – Choose whether to split company interests into Voting and Non-Voting units. This way, you can differentiate between decision-making owners and passive investors.
- Voting Procedures – Describe the process for making decisions within the Delaware LLC. Members should establish voting procedures, quorum requirements, and methods for resolving deadlocks.
- Capital Contributions – Specify the initial investments that each member makes in the company and establish consequences for members who do not meet additional funding requirements.
- Management Structure – Decide if your LLC will be managed by its owners (Member-Managed), non-owner executives (Manager-Managed), or a combination of both.
- Transfer of Ownership – Clarify if and when LLC Members can transfer their ownership interests to others and specify any restrictions on ownership transfers.
- Adding New Members – Describe the process for admitting new members into the Delaware LLC.
- Member Withdrawal – Establish how a member can leave the LLC and what happens to their membership interest.
- LLC Wind-Down – Determine what events will lead to closing the business and canceling the LLC. Outline how the members will handle winding up the company’s assets.
- Dispute Resolution Provisions – The LLC Operating Agreement should have clauses aimed at resolving disputes between members, such as mediation or arbitration.
Do You Need a Delaware LLC Operating Agreement?
Delaware’s LLC law requires all Delaware LLCs to have an Operating Agreement. Delaware allows the LLC Operating Agreement to be a verbal agreement. However, having a written LLC Operating Agreement is the only way to make the agreement enforceable.
Members in a Delaware LLC should prepare a written LLC Operating Agreement and keep a signed copy with the company’s other important internal documents.
Other than the fact that Delaware requires LLCs to have an Operating Agreement, a Delaware LLC needs a written Operating Agreement for several key business functions. Here are examples of why a Delaware LLC needs a written Operating Agreement:
- Prove Ownership in an LLC – The only way that an LLC member can prove their ownership in a Delaware LLC is by presenting a signed LLC Operating Agreement. In Delaware, the names of the LLC members are not included on any publicly filed documents. The LLC Operating Agreement is the only document that describes the rights, responsibilities, and ownership interest of each LLC member.
- Opening a Business Bank Account – Banks and other financial institutions typically need a signed copy of the LLC Operating Agreement in order to open a business account for a Delaware LLC. This is because the bank requires proof that the person trying to open the account is properly authorized to act on behalf of the Delaware LLC.
Delaware LLC Operating Agreement Benefits
Delaware LLCs experience the following benefits from having a well-prepared LLC Operating Agreement:
- Prevent Business Disputes – The LLC Operating Agreement can include provisions that anticipate future problems and help avoid litigation. Most problems in an LLC come from disagreements between members. A well-prepared LLC Operating Agreement sets expectations of the members from the start of the business to help address problems later.
- Clear Ownership – The LLC Operating Agreement clarifies each member’s ownership interest and details the exact rights and responsibilities of each Member within the company.
Best Way to Draft a Delaware LLC Operating Agreement
Members in a Delaware LLC have several options to consider when it comes to drafting an LLC Operating Agreement. LLC Members typically either prepare an Operating Agreement themselves or hire an attorney. Both options come with their own set of pros and cons, however, there is a third option to consider.
Option 1.) Draft Your Own Operating Agreement
Drafting your own LLC Operating Agreement is the cheapest option for preparing a Delaware LLC Operating Agreement. Drafting your own Operating Agreement might be the most attractive option if you are working with a limited budget. However, preparing your own Operating Agreement may not provide you with the protection that you need. If you do not have experience setting up LLC Operating Agreements, it is likely that you will make mistakes and leave out important provisions.
Option 2.) Hire an Attorney
Hiring an attorney to draft your Delaware LLC Operating Agreement can ensure that you have a comprehensive agreement that maximizes protection for your Delaware LLC and its members. However, hiring an attorney is not the best option for every business.
The obvious disadvantage of hiring an attorney is that attorneys are expensive. An attorney can charge high fees for providing you with a cookie-cutter LLC Operating Agreement that can be found online.
Option 3.) IncNow’s Ready-to-Sign LLC Operating Agreement
A better option is IncNow’s Ready-to-Sign LLC Operating Agreement. IncNow’s Operating Agreement comes included in our Delaware LLC Formation Packages and is prepared by Delaware corporate attorneys who have been setting up Delaware LLCs for 50 years. IncNow can customize your LLC Operating Agreement to fit the specific needs of your Delaware LLC.
Delaware LLC Operating Agreement Tips
Here are our top three Delaware LLC Operating Agreement tips to help you run your LLC properly:
- Put It In Writing – A Delaware LLC should have a written copy of the Operating Agreement that is signed and agreed upon by all the LLC members. Although Delaware allows the Operating Agreement to be verbal, putting it in writing is the only way to make the agreement enforceable. If a Delaware LLC does not have a written Operating Agreement and there is a business dispute between the members, then it is up to a judge to interpret how the company is structured and who owns what.
- Adapt as the Business Grows – Update the LLC Operating Agreement whenever there are significant changes in the business. Examples include transfers of ownership or changes in management.
- Cover Key Aspects – A Delaware LLC Operating Agreement should be comprehensive and include details about important aspects of the business. The Operating Agreement should address things like capital contributions, ownership percentages, management structure, fiduciary responsibilities, buy-out rights, transfer restrictions, tax matters, and much more.
IncNow includes your signature-ready LLC Operating Agreement in our “Complete LLC” and “Now LLC” packages.
MORE: Capital Distributions with the LLC Operating Agreement
Frequently Asked Questions: Delaware LLC Operating Agreement
- Do You Publicly File a Delaware LLC Operating Agreement?
No, you do not file your LLC Operating Agreement with the state of Delaware. A Delaware LLC Operating Agreement is a private company document. Delaware does not require LLCs to make their Operating Agreement publicly available.
- Can an LLC Operating Agreement be Changed After it's Signed?
Yes, the LLC members can agree to make changes to the original LLC Operating Agreement even after they have signed it. Making changes to the Operating Agreement requires preparing an Amended and Restated Operating Agreement.
- Can an LLC Operating Agreement Have Different Classes of Members?
Yes, an LLC Operating Agreement can establish different classes of members with different rights and responsibilities in the company. The most common example is Voting and Non-Voting Members. A Voting member has ownership in the LLC as well as the right to vote on any major decisions made on behalf of the company. A Non-Voting can be a passive investor with ownership in the LLC. However, a Non-Voting member does not have any say in how the LLC operates.
- Does a Single-Member LLC Need an Operating Agreement?
Yes, a Single-Member Delaware LLC should have a written LLC Operating Agreement signed by the sole member. Although the single-member has complete control in a Single-Member LLC, an LLC Operating Agreement still gives the member proof of ownership in the LLC.
- Does a Delaware LLC Operating Agreement Help With Succession Planning?
Yes, the LLC Operating Agreement is crucial for successful succession planning. Delaware LLCs are popular amongst family-owned businesses because it is easy to transfer ownership and pass the business along to their heirs. The LLC Operating Agreement can include detailed succession plans to help keep the business within the family.