What is a Delaware LLC Operating Agreement?
A Delaware LLC Operating Agreement is a legal document that sets forth the rules and regulations for the operation of a limited liability company in the state of Delaware. The agreement should be created by the LLC’s founders and approved by the LLC’s members.
Why is an operating agreement important?
There are a number of reasons why the operating agreement is important for an LLC in Delaware. A few of which include:
– In the event of a legal dispute, an LLC without an operating agreement may have to follow generic state rules which may not negatively impact the member’s personal asset protection.
– The roles, responsibilities, and expectations of the members are in writing which will reduce future conflicts.
– As a single-member LLC, having an operating agreement may help to better protect the entity’s limited liability status.
– When applying for financing, a lender will often want to see one before opening a business bank account to ensure the members have the authority to borrow on behalf of the entity.
– Potential investors and partners will request one when evaluating a business.
Is an operating agreement required in Delaware?
Delaware Statute § 18-101(9) states that multi-member LLCs in Delaware must have an operating agreement. Despite it not being required for single-member LLCs, there are several reasons it is recommended to have one.
Currently, only six states require an operating agreement – California, Delaware, Maine, Missouri, Nebraska, and New York.
Can I write my own operating agreement?
While using an attorney is the safest option as they will customize the document to fit the specific needs of your business, the free operating agreements from the providers above will be better than trying to create one from scratch.
What should be included in an operating agreement?
An operating agreement can be as structured or unstructured as the members deem necessary. Some elements to consider putting in an operating agreement include:
– Business information such as the LLC’s name, principal office address, the purpose of the business, duration of the LLC, etc.
– Ownership structure
– Name and address of the Delaware registered agent
– Amount of each member’s share of capital contribution and the percentage of their ownership interest
– Management – member-managed vs member-managed
– Scope of the manager’s authority
– Fiscal year of the LLC
– Bank account information for the LLC
– Employer Identification Number (EIN) of the LLC
– Entity tax election
– Roles of the members (including financial authority, signing contracts, etc.)
– Names and addresses of the LLC members
– When and how members receive compensation and distributions
– Meeting information and voting rights
– Procedures for adding a new member, removing a current member, and the resignation of a member
– Process for the amendment of the operating agreement
– Process regarding the dissolution or bankruptcy of the LLC
– How any remaining assets will be divided after the liquidation of the LLC
Where is an operating agreement filed?
The operating agreement isn’t filed with the state of Delaware. A signed copy should be kept where the company records are stored in addition to each LLC member having one as well.
Does an operating agreement need to be notarized?
An operating agreement doesn’t have to be notarized in Delaware to be legally binding in Delaware as it can be a written, oral, or implied contract. However, only a notarized operating agreement can be enforced.
At a minimum, it is recommended that all members sign and date the operating agreement. This will help to acknowledge the agreement has been received and reviewed by the LLC member.
Is the Operating Agreement the same as the Certificate of Formation?
No. The Certificate of Formation is a formation document that is used to create the business entity with the Delaware Secretary of State. The operating agreement is an internal document that outlines the governing structure and operating guidelines of the entity along with the responsibilities of the members.
Related: How to form an LLC in Delaware
Delaware LLC Operating Agreement Template
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