What is a Delaware LLC Operating Agreement?
At the outset, the members (owners) of a Delaware LLC have the ability to arrange the LLC’s affairs however they wish via agreement. The way in which the LLC is organized is spelled out in its Delaware LLC Operating Agreement. This agreement among the LLC members sets forth the ownership, management structure and operating procedures for the LLC.
Here are a few important things to know about the Delaware LLC Operating Agreement:
- It’s a private document. – The state of Delaware does not require you to file publicly the LLC Operating Agreement, nor does it require a list of the members and managers. The original should be kept in safe keeping in company files and each Member should keep a copy.
- Get it in writing. – Even though the Delaware LLC Act states that it is legal for an Operating Agreement to be “written, oral, or implied”, documenting it in a formal written contract is the only way to make it enforceable. Delaware Courts enforce your Delaware LLC Operating Agreement as written. IncNow will prepare a proposed LLC Operating Agreement as part of most service packages. You can modify this before signing it.
- It may be needed to open a business bank account. – In order to verify you have “signing power” for the LLC, financial institutions will require a copy of your Operating Agreement in addition to the LLC’s Federal Tax ID Number (EIN) to open a business bank account.
- It should be updated as business needs change. – Should members wish to change the agreement or ownership structure, an amended and restated LLC Operating Agreement should be drafted and signed each time the agreement changes. IncNow can assist with changing Members of your LLC.
Understanding the Role of the Delaware LLC Operating Agreement
Aside from setting forth ownership and management structure, the Delaware LLC Operating Agreement should anticipate and provide solutions to common future problems to avoid litigation.
A well-drafted Operating Agreement should serve like a prenuptial agreement to avoid most partnership disputes between members should any member decide to go in a different direction. It sets the expectations of the parties from the outset to address problems later. From our experience, most problems in an LLC result from owner disagreements. This Operating Agreement helps to address those issues in advance to reduce the chances for problems later.
It should set forth capital contributions, ownership percentages, management structure and fiduciary duties. It should also address buy-out rights, valuation formulas, transfer restrictions and tax matters. All members of the LLC must agree to the terms of the Operating Agreement for it to be binding upon them.
Those provisions should address:
- LLC Ownership – Including who the members of the LLC are, whether there are different voting rights between members, and the units of company interests owned by each member. Often LLC Operating Agreements have two classes of interests, voting and non-voting.
- Voting Rights – Company Interests can be divided into Voting and Non-Voting units to separate owners into ones who make company decisions and those who are passive investors.
- Capital Contributions – What are the consequences if a Member fails to make his initial capital contribution or fails to make subsequent capital calls?
- Management Structure – Establishes whether the LLC will be run by its owners (“Member-Managed”) or run by non-owner executives (“Manager-Managed”) or a hybrid that allows for concurrent management by both, with a right among the Voting Members to hire and fire the manager.
- Transfer of Interest – Spells out whether a member can transfer interests to another person and what restrictions are placed on such transfers.
- Member Withdrawal – The terms in which a member can leave the LLC, and what will happen with their interest, as well as what happens if they die or become incapacitated.
- LLC Wind-Down – What events trigger the dissolution and subsequent cancellation of the LLC and how the “winding up” of company affairs will be handled.
IncNow includes your signature-ready LLC Operating Agreement in our Complete and NOW LLC packages.