An LLC operating agreement is a legal document that defines the roles and responsibilities of a limited liability company (LLC). Its contents usually define who does what, how financial and operational decisions get made, and what happens in case of sale or dissolution of the LLC, among other things.

While Delaware does not legally require that you draft an operating agreement or file it with the state, it is still a good idea to have one if you open an LLC in Delaware. In this post, we’ll take a closer look at what an operating agreement is as well as why it’s important. We will also discuss the key components of an operating agreement and how to get started, then cover some basic FAQs.

What is an LLC operating agreement?

An operating agreement says exactly what happens when, how, and by whom in a company. While it doesn’t go into crazy specific details, it does give a clear general overview of where the rights and responsibilities lay for each member or stakeholder of the LLC.

One of the main benefits of this is protecting everyone involved in the limited liability company by explaining what is (and is not) expected of them. The other main benefit is outlining how operations will proceed at the company, so as to minimize confusion and make relationships smoother.

Why is an operating agreement important for Delaware LLCs?

While Delaware does not mandate that you write out an LLC or file it with the state, it’s still a good idea to create a written document. Without it, you may face confusion or unwanted legal challenges in times of crisis. With it, you have a guide in hand when you need it.

Plus, the state considers verbal or implied operating agreements in times of dispute, which may not accurately represent your members’ wishes when the time comes. If you want to make sure you cover your bases, it’s important to write everything down.

An operating agreement also forces you and the other members of your LLC (if any) to think through possible disagreements down the road. In the early heyday of setting up a company, it’s tempting to dismiss these as impossible, but they happen all the time. If you decide how you’ll deal with them upfront, you’re likelier to keep your business and your relationships intact. If you have to go through the messy process of figuring these out on the fly, that becomes less likely.

Key Components of a Delaware LLC Operating Agreement

The essential sections of an LLC operating agreement typically include, but are not limited to:

Ownership structure

This section details who owns how much of the company. It typically also includes how much each member of the LLC initially contributed to the business, which is often related to how much of the business they thus own.

Member roles, rights, and responsibilities

Job titles, responsibilities, and management structures are usually detailed here. This section may also cover compensation.

Voting rights and decision-making

Decision-making processes, meeting schedules, and voting rights are outlined here. Everyone involved in the LLC should know ahead of time what power they will have to chart the course of the company ahead, which will help avoid misunderstanding or strife.

Profit and loss distribution

How a company will distribute profits (money) and losses (important for tax reasons) is important, as both have immense financial implications and value. You don’t want to argue over something like this later!

Dissolution terms

Should you decide to sell the company, or your share of the company, it’s important to have strictures in place for how to do it. If everyone wants to dissolve the company instead, there should also be a formal process for that.

How to Create an LLC Operating Agreement in Delaware

Not being legally mandated, there is no strict approach to how you should create your operating agreement. However, there are a few basic steps involved:

1. Meet with all stakeholders to determine the basic information, as dictated by the above sections.
2. Review operating agreement templates to see what exactly should be included and how it should be written out.
3. Have someone at the LLC draft the agreement, then distribute it to all members for review.
4. Make the necessary changes so that everyone at the company feels represented.
5. Have everyone involved sign the operating agreement.
6. Optional: Do the signing in front of a notary public, who can witness the signatures and provide the official seal of approval.
7. Distribute copies of the finished operating agreement to all involved.
8. Keep both electronic and paper copies somewhere safe and secure, so you can refer to them when needed.
9. Optional: Should you need to amend the agreement, follow a modified version of the above steps in which you call a meeting, draft out new information, get approval, and re-sign the document.

If you’re not sure how to do all this, it’s important to consult a legal professional. Operating agreements are contracts, considered legally binding by the state of Delaware. Whatever you put in print, you will be obliged to live by later. So while it might seem like an annoying extra step, doing it right can save you boatloads of heartache down the road.

Delaware-Specific Considerations

In Delaware, the operating agreement can be either written or verbal. It can also be implied, which means if you do business in a certain way or there has been an understanding between members of the LLC that makes a certain course of action seem reasonable, you may be bound by that as well. If you’re worried about misinterpretations, it might behoove you to draft an official operating agreement to govern such situations.

According to Delaware Code Title 6 §18-101, operating agreements do apply to single-member LLCs. That is to say, if you draft a written operating agreement and something occurs to which the operating agreement refers, you are legally bound to follow through according to the mandates of the agreement. Make sure that your operating agreement reflects not only how you feel now, but how you’ll feel down the road. That’s where a bit of professional help comes in handy.

Final thoughts & next steps

Given what a simple process it is to draft an operating agreement and keep it on hand, there’s no reason not to take this precautionary step. It is invaluable in times of crisis, disagreement, and dispute, and can help minimize fallout from any unforeseen event, so why wouldn’t you?

If you’re not quite sure how to get started, ask the experts. An LLC formation service knows exactly what to put into your operating agreement and can help you get it right. You don’t have to reinvent the wheel; you can focus on what you do best instead.

Sound good? Our team is happy to help you put a contract in place now, for a very reasonable fee, that might save your business down the road. And saving your business? Well, that’s invaluable. All you have to do is get in touch.

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