LLC Operating Agreement

Capital Contributions

Membership percentage usually goes hand-in-hand with how much money or other resources each person contributes to the startup costs. Even if you use this section to define a different strategy for assigning membership percentage (sometimes called ownership interest), it’s important to document the initial capital contributions of each member. Valuations are acceptable for non-cash initial contributions, like real estate. If you don’t want to take up too much space in the operating agreement itself, refer to an attached exhibit or other appendix.

Language indicating whether members owe additional capital obligations, including the presence or absence of mandatory additional contributions, can also be included in this section.

Profits, Losses, and Distributions

This section describes the nitty-gritty of how your LLC accounts for its money: how and when net profits or losses are determined, and importantly, how, when, and to whom distributions are made. Our template says that members receive distributions annually or “as they see fit” according to their ownership percentage. It also discusses the Treasury Regulations that govern distributions if the company dissolves or a member withdraws.

This section might seem obvious for multi-member LLCs—after all, everyone wants to get paid!—but it’s important too for single-member LLCs to help preserve the distinction between you as an owner and the company as a separate entity.

Management

The management section defines the power and scope of responsibilities and liability for members and managers. In other words, this section describes who’s responsible for making which decisions. Will your LLC hire managers? Will members assume the kinds of powers that would otherwise be ascribed to managers? This section is where you’ll clarify those policies and describe the powers members and/or managers are authorized to execute.

Since we’re already talking about management, our template also uses this section to discuss exculpation and indemnification. In plain language, this is where we explain the circumstances under which the LLC won’t pursue legal action against a member or manager for actions that somehow harm the company.

Finally, someone’s got to keep records related to company information and other critical documents, like tax returns and annual reports. Our template provides information about those policies here.

Compensation

We wrote this section of our template in two parts. The first affirms that any managers hired will be compensated fairly for their services; in the absence of managers, any services rendered by members will be compensated fairly. Regardless of whether your LLC hires managers, you’ll need to plan for how the company will reimburse your out-of-pocket business expenses. We used the second part of this template to state that the LLC must reimburse those expenses.

Bookkeeping

Keeping accurate account of your finances is of critical importance. This section describes the term of your LLC’s account period, where books will be maintained, and how reports will be prepared and delivered. Our template includes additional stipulations maintaining separate capital and distribution accounts for each member, which makes it easier to keep track of each member’s capital investments compared to the profits distributed to them.

Transfers

Writing down how your limited liability company will handle transfers of membership smooths those transitions. We wrote an right-of-first-refusal clause into our template. You can choose not to include one, but you’ll still need to decide how to handle sale, assignment, or disposal of membership interest. It’s especially important to get down in writing whether purchase of membership interest automatically confers the rights and responsibilities of ownership to the purchaser.

Dissolution

It’s only practical to plan for the end at the beginning. Use this section to discuss the circumstances under which the LLC may be dissolved and write a plan for handling debts and other obligations, including final distribution of assets and capital to members.