LLC Operating Agreement

The LLC operating agreement is the heart and soul of the LLC and much of what I can do for an LLC and its owner/members is delivered in the contents of the LLC operating agreement (see “Form” LLCs for more on my LLC operating agreements).

The LLC operating agreement directs how the LLC will function. It states how LLC owner/members get paid, how they will deal with each other, deal with third parties, and deal with a crisis. The operating agreement also directly effects potential creditors who will have much the same rights, or “stand in the shoes” of either a debtor LLC or debtor LLC owner/member.

An LLC operating agreement can be small or large in scope. I have yet to see any advantage to a “small” LLC other than the initial cost (one example would be Internet do it yourself LLCs). The larger the area of coverage, the greater the potential effectiveness of the LLC. That is, the more potential situations dealt with in the LLC operating agreement, the more areas in which the LLC can further clients’ business or investment goals and the more areas it can enhance asset and liability protection.

Because I draft my own operating agreements and can modify them without creating problems (see Why “Form” LLC Operating Agreements Are Not Usually Modified), I am free to constantly expand them their scope.

An old but sometimes still asked question is whether an LLC really needs its own written LLC operating agreement. My answer is an unqualified “yes” for both Single Member LLCs and Multi-Member LLCs (see Single Member LLCs Need Operating Agreements and South Carolina Statutory Default Rules). Without one, the LLC Act, becomes your operating agreement and it is about the “narrowest” or “smallest” LLC operating agreement there is. Further, clients may not like the provisions of the LLC Act.

My LLC operating agreements are a blend. I draft my own provisions, I use other people's provisions, I review LLC literature, and I read LLC operating agreements. I modify everything as needed to blend it all into a cohesive operating agreement.

Drafting my own LLC operating agreements allows me to use my Pre-Organization Questionnaire Letter because I can draft client responses into the operating agreement. I also work on provisions to make my operating agreements easier to understand (see Centralized Voting Lists for LLC Operating Agreement and Highlight Important Terms in the LLC Operating Agreement).

“If a man write a better book, preach a better sermon, or make a better mouse-trap than his neighbor, tho’ he build his house in the woods, the world will make a beaten path to his door.” Ralph Waldo Emerson, quoted by Sarah S. B. Yule, Borrowings (1889).