101 on the LLC (Limited Liability Company) Operating Agreement

The Delaware legislature created the Limited Liability Company business form to give maximum effect to the members’ freedom to contract with one another upon whatever terms they deem best suited to their circumstances and goals. In a corporation, for example, Delaware law requires certain terms be included in the corporation’s constituent documents, mandates certain provisions related to corporate governance, and limits (to some extent) the ability of parties to modify certain terms relating to voting or fiduciary obligations, among other things. In an LLC, however, the members are free to organize the LLC in whatever manner they choose, with near-total freedom to define the relationship among the members and the terms governing the operation of the entity. The fundamental terms of an LLC’s ownership, operation and management are set forth in its LLC agreement.

An LLC agreement can be a written document or merely an oral understanding. Also, it may be in any language the members want. A written agreement, however, is typically used because it memorializes the understanding and agreements of the members, which, in the event of a later dispute or misunderstanding or the unfortunate possibility of litigation, is an invaluable protection in the interest of all parties. Although each LLC agreement is different, an LLC agreement will generally set forth certain fundamental terms such as:

• The ownership percentage of each member, or the way it is calculated at any given time
• The manner in which profits, losses and expenses are allocated, and by whose authority
• The authority of members to bind the LLC and participate in day-to-day management
• The voting rights, if any, of each member in making certain key decisions
• The circumstances under which a member may withdrawal from the LLC, and the way in which the member’s economic interest is calculated upon withdrawal
• The ability or restrictions of a member to sell or pledge its interest to a third party
• Terms contemplating the death or disability of a member
• The circumstances and terms under which new members may be admitted, or not
• The circumstances under which the LLC will be liquidated, and the priority of claims among the members upon liquidation
• Indemnification rights (if any) in the event the LLC or member is sued in connection with the business of the LLC

Delaware does not require that the LLC operating agreement be filed at any public office or that it be made publicly available. A Delaware LLC is typically formed anonymously by the filing of a Certificate of Formation with the state, which includes only the name of the LLC and the office of the registered agent.

Once completed, the LLC Operating Agreement must be signed by all the members. Since it is a contract, it must be agreed to by all participating parties. It is best to have it signed before a notary public and get a certified copy of the notarized copy for each signer.

Once in force, the operating agreement remains in force until amended or changed by the unanimous consent of the members, unless the agreement itself calls for an expiration date.