Why does a limited liability company (LLC) need an operating agreement?

The Delaware Limited Liability Company Act provides an outline for the operating of every limited liability company in the form of default rules. All of these default rules can be modified by the company’s Operating Agreement, with the exception of the implied contractual covenant of good faith and fair dealing.

For a single member LLC, the need for an operating agreement is less obvious than for an LLC that has 2 or more members.

The Delaware LLC Act provides that the operating agreement may “written, oral or implied”, however each Delaware LLC must in fact adopt an operating agreement in one of those forms. If the LLC claims to have an oral or implied agreement, there is no evidence of what the parties supposedly agreed to when a dispute or disagreement arises.

The single member LLC should have a written operating agreement to evidence that it is in compliance with the Act. The fact is that most banks require that you provide a copy of your operating agreement when you open a bank account. I you are sued, the first thing that the plaintiff’s attorney will ask for is a copy of your operating agreement.

With a multi-member LLC, the need for an operating agreement should be obvious to you. How will your LLC be managed? Who will have the responsibility to manage the LLC? If more than one person will manage the LLC, how will decisions be made and will each person managing the LLC have equal votes? How will profits be distributed or will profits be distributed rather than retained and invested back into the LLC? Will there be distributions so that I can pay my taxes? Do I have an obligation to contribute additional funds to the LLC over and above my capital contribution? What happens when a member does not contribute additional funds mandated by the operating agreement? What happens if there is a disagreement between members? Can a member sell his or her interest in the LLC to an outsider? Can a member transfer all or part of his or her interest to a spouse or children without the approval of the other members? What happens if a member dies or becomes disabled? If things aren’t working for me, how do I get out of this LLC?

These and other question are addressed in a well drafted operating agreement. When a member of an LLC comes to an attorney to discuss an internal business problem or dispute, the first question asked is whether the LLC has a written operating agreement. A well drafted LLC operating agreement should answer most, but maybe not all questions.

Delaware Corporate Agents, Inc., offers for sale a single member operating agreement and relatively straight forward multi-member operating agreement. The adoption of an operating agreement is important enough to discuss the agreement with your attorney. Buying forms from Delaware Corporate Agents, Inc., is not a short cut around your attorney. It is important that you review the forms with your attorney before signing the document. The form may not fit for your transaction or you may need/want addition provision and protections added to the form by your attorney.