Forming a District of Columbia LLC takes a lot of planning. Between the Articles of Organization, business licenses, LLC taxes, and more, there’s a lot to consider. And D.C. LLC startup costs aren’t the only necessary tasks.
You’ll also want to set up your LLC to run smoothly and avoid legal troubles after it’s been registered with the District.
That’s where the LLC operating agreement comes in.
What Is an LLC Operating Agreement?
An operating agreement gives your business structure and official procedures. It designates ownership, establishes operations, defines member responsibilities, and provides legal protection. Essentially, it lays out everything someone might need to know about your LLC. And it’s an internal document, so there’s no filing or fees involved.
Am I Required to Have an Operating Agreement in D.C.?
No. The Code of the District of Columbia Section 29-801 states that “a limited liability company shall be bound by, and may enforce, the operating agreement, whether or not the company has itself manifested assent to the operating agreement..” Regardless, we highly recommend creating one, as it will provide huge benefits to your LLC down the road.
When you’re busy completing all the other tasks to start your LLC, this might seem like just another task, so why not avoid it? Well, the operating agreement establishes standard processes that will help your business run smoothly, ensures legal protection in disputes, dictates member duties and actions, and gives you control over asset and income allocation, among other things. While it might be tempting, don’t skip it!
Benefits of Creating a D.C. Operating Agreement
You want what’s best for your business. Months or years in the future, you want it to be a profitable and thriving endeavor. Having an operating agreement in place will set up your LLC for sustained success.
It requires some legwork, but it’s well worth it. Just look at some of the benefits:
- Officially designates how the ownership is split up (the percentage each member/manager owns), so there are no disputes.
- Standardizes office and company operations to improve efficiency.
- Outlines the procedures for member additions and resignations, registered agent changes, dissolutions, and more, so there is no confusion.
- Avoids the District of Columbia’s “default rules,” which define baseline procedures for any LLC without an operating agreement and aren’t necessarily the best for your business.
- Grants you greater respect from District courts.
Free D.C. LLC Operating Agreement
Almost every form you need to start your LLC is available on the Department of Consumer and Regulatory Affairs CorpOnline database. Unfortunately, the operating agreement isn’t one of them.
So, you’ll need to create your own, but don’t be intimidated! You don’t need to be an attorney or expert writer to draft an effective agreement. Plus, you can find plenty of free templates online to help you with the structure and legal terminology. While most of these templates are good options, a great starting point is one that you can get for free from TRUiC or Northwest Registered Agent.
Whether you’re using a template or starting from scratch, here’s a quick and easy guide on what to include:
- Owner or Member Information: Names and mailing addresses.
- Company Information: Your LLC’s name and principal office address.
- Registered Agent Information: The name of your registered agent, their address, and contact information.
- LLC Formation: The date you filed or will file your Articles of Organization with the DCRA.
- Business Purpose: The type(s) of business your LLC will be doing in the District of Columbia.
- Term: How long your LLC in D.C. will be valid, typically until you file for termination.
- Capital Contributions: The amount of money each member has invested in the LLC.
- Profits, Losses, and Distributions: How income and debts are allocated among members and methods for distributing funds.
- Ownership Percentage: How much of the company each member owns.
- Management and Roles: The managerial structure and decision-making processes, naming who is in charge of certain operations.
- Compensation: How members/managers are compensated and reimbursed.
- Bookkeeping: Accounting procedures and member account policies.
- Tax Treatment: Whether your LLC will be taxed as a sole proprietorship, general partnership, S corporation, or C corporation.
- Member Additions: The procedure for bringing on new members – how they will be admitted, if they’re entitled to income, any expenses they will owe, their roles, etc.
- Member Withdrawal: Procedures for the resignation, expulsion, retirement, or death of an existing member.
- Amendment Procedures: How your LLC will approve changes to the operating agreement. Usually, it’s through a majority vote by the members.
- Dissolution: What happens when you terminate your LLC, including how your members will split up the remaining assets or debts.
You don’t always need to include all of the above. If any don’t apply to your LLC, feel free to leave them out. Still, it’s a good idea to cover as many bases as possible. Even if you’re a single-member LLC, you should consider including as many sections as possible to accommodate future changes. Otherwise, years into the life of your business, you may run into a dispute over something you didn’t include, and you won’t be able to fall back on the operating agreement.
All finished? Make sure to get signatures from each of your LLC’s members approving the agreement. Then, file it in a safe place, as you’ll likely need to refer to it later. Since it’s not a required document, you don’t need to submit it to the DCRA or pay a filing fee.
Making Changes to Your Operating Agreement
For better or worse, your business is going to change. As you begin doing business in D.C. and, hopefully, raking in profits, the LLC will grow and evolve. It will develop different needs and more complicated processes. Keep everything running smoothly but update your operating agreement as changes occur.
First, all LLC managers/members must approve the change. To seek approval, follow the guidelines you already outlined in your operating agreement for ratifying amendments.
Because it isn’t recorded with the state, modifying your agreement is as simple as making changes to the Word document or PDF you keep in your own files.
For example, your registered agent resigns and, following D.C. law, you appoint a registered agent service to take their place. Simply pull up your electronic file, enter the new agent information, save it, and print a copy. Make sure you keep a draft of the previous document as well so you can track the changes you’ve made, just in case the state ever has any questions.
Hiring an Attorney
Worried that you might miss a critical detail? Uncomfortable with legal minutiae? If you want to ensure your operating agreement provides for all possible outcomes and disputes, you might consider hiring an attorney to review it or write it entirely.
Some attorneys have a flat rate for drafting an operating agreement; others bill by the hour. Either way, you’ll only need their assistance for a limited period of time. Use a site like Avvo to find the right fit for your business. Avvo’s database lets you sort by location, rate, and more – it even shows D.C. lawyers that specialize in LLCs.
Hiring an LLC Formation Service
The LLC formation process, with its forms and fees, might make you want to throw up your hands and surrender. Don’t do that! Instead, consider hiring an online service like ZenBusiness or Northwest Registered Agent.
An online service like we mentioned earlier can quickly take care of all your necessary filings. Plus, they can create a customized operating agreement for you!
Given the amount of time you would spend drafting an agreement from scratch, a formation service is worth it. Not only will you receive a meticulously researched and crafted operating agreement, but you’ll also be able to spend more time growing your business, planning your next move, or just relaxing.
Despite the fact that the operating agreement isn’t mandatory, Arizona still has laws about what it can and cannot do.
By the state’s definition (Code of the District of Columbia, Title 29, Chapter 8), an operating agreement’s purpose is to govern relations, rights, duties, and operations of an LLC’s members. But the document is flexible and can include “any provision that is not contrary to law.” This gives LLC owners the option to structure and control their business as much or as little as they would like.
But this flexibility isn’t unlimited. An operating agreement may not establish any processes that violate District or federal law, and it doesn’t change the LLC’s culpability for such violations. It cannot make an LLC exempt from registered agent requirements, filing requirements, etc. Further, the operating agreement cannot “unreasonably restrict” an LLC member’s duties and/or rights.
Anything not specified by your operating agreement will be subject to the District’s default laws. For example, if you don’t define how remaining assets should be distributed after your LLC’s dissolution, the District will make that decision for you. An operating agreement is preferable because it’s customized for your business, while state default laws aren’t, so they likely won’t be the best option.
Stay within the guidelines within the District’s statutes, and be sure to make your operating agreement as detailed as possible (so there’s no room for interpretation) and you’ll be good to go!