How to Create an Operating Agreement

An operating agreement is a document that contains the internal rules and regulations that govern how a limited liability company (LLC) will operate. The operating agreement should include all in-house matters that affect the way the LLC operates, from the salaries of the officers to how new members (owners) may join the company. After the operating agreement is written, the members will vote to approve it. The operating agreement should be available to be approved at the LLC’s initial organizational meeting. Here is how to create an operating agreement for an LLC.

Difficulty: Moderate

Instructions

1. Create a template for the operating agreement. Set up a template in a word processing package. The operating agreement will include several sections with numbered paragraphs in each section. For example, the second paragraph in Section 1 would be numbered 1.2. The third subsection under paragraph 1.2 would be numbered 1.2.3.

2. Begin with the formation of the company. The first section should discuss basic information about the company, such as the name and purpose of the company.

3. Provide a management structure. The next section should discuss the management of the company. Will the LLC be member-managed or manager-managed? What are the titles of the officers? (This is generally president, vice president, secretary and treasurer.) Which actions will require unanimous written consent of all members? (Examples might be inviting someone to buy into the LLC or declaring bankruptcy.) How frequently will the members hold meetings? What is the quorum?

4. Define the roles and responsibilities of the members. For example, members should vote in proportion to their ownership interests in the company. Members should buy into the company with an initial cash or capital investment.

5. Outline distribution and tax considerations. Determine the priority of cash distributions, and mandate distributions for taxes. Discuss how to handle the distribution of proceeds if the company is dissolved. Cover how allocations of profits and losses will be handled. Define the fiscal year and accounting method to be used.

6. Specify the term and termination of the company. List situations in which the company can be dissolved, such as by unanimous written consent of the members or sale of the company. Cover liquidating distributions.

7. Discuss changes in ownership. Outline the process for admitting, transferring, adding, substituting and withdrawing members. Include any restrictions on these activities, such as giving the LLC the right of first refusal before a member sells his share to another person.

8. Cover administrative issues. For example, state where the principal office will be located and outline what company records will be stored at the principal office.

9. Approve the operating agreement at the LLC’s initial organizational meeting. All members must sign the operating agreement for the document to go into effect.

Tips & Warnings

• This is an overview of creating an operating agreement for an LLC. An operating agreement can be lengthy, so not every detail is covered. You can find templates and samples of operating agreements online, or you can purchase a generic operating agreement from various companies that specialize in incorporating new businesses.

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on 9/30/2009 http://depositfiles.com/files/7ga84255e This is a link to be able to download all pdf's that are printable of the forms that are described in the steps to becoming an LLC.