Get a District of Columbia (DC) Operating Agreement Template Today

Deciding to follow your passion and create your own business is a huge decision. Officially taking the leap and creating a limited liability company (LLC) in the District of Columbia is a great first step to protecting your personal assets. 

An LLC officially distinguishes between you and your business in the eyes of the courts. One of the biggest benefits of an LLC is that it protects your assets, and an Operating Agreement goes a step further. 

In this guide, we’ll cover the basics of a limited liability company Operating Agreement for a Washington, D.C., LLC and how to draft this important document. 

What is a District of Columbia LLC Operating Agreement?

An Operating Agreement explains a business’s rules, how it will make financial decisions, and provides additional personal protection. According to the U.S. Small Business Administration (SBA), owners of an LLC (called “members”) should draft an Operating Agreement. However, since it is not required by law or filed with the state, LLCs should keep their Operating Agreement with other important business papers.

When drafting an Operating Agreement, you might come across some confusing terms. Here is a short list of definitions you’ll need while drafting your Operating Agreement:

• Contribution: Any benefit that an individual provides to an LLC 
• Distribution: The transfer of money or other property from the LLC to an individual 
• Manager: Someone who is performing management functions for the LLC and is listed as a “manager” under the Operating Agreement 
• Organizer: The person who forms the LLC

Why do I need an LLC Operating Agreement in the District of Columbia?

Although a District of Columbia LLC is required to file Articles of Organization with the Department of Consumer and Regulatory Affairs (DCRA), creating an Operating Agreement is not legally required. However, it can help protect you and the business you worked so hard to build. An Operating Agreement is another step that business owners can take to protect their personal assets. It goes beyond the formation of an LLC and helps define your business as a separate entity. 

Benefits of drafting an Operating Agreement in the District of Columbia include:

• Define business rules: An Operating Agreement clearly outlines business rules to govern your LLC. This is particularly important when businesses grow and more members are added. 
• Protect personal assets: An Operating Agreement can help protect your personal assets from the liabilities of your LLC. 
• Pass on ownership: An Operating Agreement puts into writing succession plans if an owner were to leave the LLC and what happens to their voting rights. 
• Establish agreements: If members of an LLC make verbal agreements, misunderstandings can take place, which is why it’s a good idea to write down the rules and regulations of your LLC.   
• Receive funding: Creating an Operating Agreement gives investors more incentive to invest in your business because it outlines your legal and financial details. Additionally, most banks will require an Operating Agreement to open a business bank account.
• Avoid default laws: Without an Operating Agreement, your LLC will be subject to the default rules and guidelines set by the District of Columbia. An Operating Agreement can spell out how you would like the business to operate and what happens under certain conditions, such as the dissolution of the company.

What do I include in my District of Columbia LLC Operating Agreement?

Whether you are a single-member or multi-member LLC, you’ll want to draft an Operating Agreement during your initial LLC formation process. Starting a company can be tiring enough, and the added paperwork might feel like a nuisance that you can skip. However, operating your business without an Operating Agreement is risky. 

Luckily, ZenBusiness has a template that you can reference while you draft a comprehensive Operating Agreement. 

An Operating Agreement may include: 

• Your legal business name
• Voting rights and responsibilities of the members
• Percentage of ownership for each member 
• How profits should be distributed 
• Rules for buyouts and sell-outs 
• How and when meetings should be held
• How management should be structured 

In the District of Columbia, there are specific parameters for an Operating Agreement and default regulations. You can customize your Operating Agreement to have certain rules for your LLC; however, there are some restrictions. Most importantly, an Operating Agreement cannot restrict any state requirements. 

Even though it is not a strict requirement to create an Operating Agreement in the District of Columbia, all LLCs are subject to default rules and regulations. In short, D.C. has default rules for member relations, the rights and duties of managers, the activities and affairs of the company, and the conditions for amending the Operating Agreement. The following will cover four important parameters for an Operating Agreement in the District of Columbia.  

Items to include in your District of Columbia Operating Agreement:

1. Membership

Operating Agreements should address the LLC members. The District of Columbia has certain rules for membership. To begin, all members of an LLC are bound by the Operating Agreement. All members must also agree to the terms of the Operating Agreement. 

Operating Agreements help members:

• Avoid fights: By drafting a comprehensive Operating Agreement, members can avoid in-fighting.
• Be adaptable: An Operating Agreement can outline what members of the LLC do. For example, if someone initially invests 90% into the LLC, they might avoid doing the majority of the day-to-day work, whereas the person who invested 10% might be in charge of everyday operations. Dictating the expectations of members is a great thing to put in the Operating Agreement. 

What this section should address:

• Which members are in charge of which duties
• Who is expected to do what tasks
• What members should do if there is a disagreement 
• What day-to-day tasks should look like for each member
• Members’ capital contributions to the LLC
• The percentage of ownership for each member

When addressing membership in the Operating Agreement, consider: 

Transferable Interest

In the unfortunate event that a member passes away, becomes incapacitated, etc., the LLC will need to create guidelines for how to address transferring their ownership. In some cases, an LLC may describe certain situations that members can transfer ownership.

Membership Dissociation

Every LLC should cover what to do if a member needs to leave the business. By default, any member can dissociate at any time. If an LLC would like to set specific parameters about which situations members can leave, it can do so here. This section should also cover what to do if a member wrongfully dissociates and if they will be held liable to any damage that leaving the LLC caused.

In addition, a section about member dissociation in the Operating Agreement should acknowledge when members can forcibly remove a member from the LLC. In some cases, an LLC might have written that if a member breaks the Operating Agreement, they will be dissociated.

Even single-member LLCs can benefit from an Operating Agreement. This is because the Operating Agreement can help show that you are a real business. Let’s say that you need investors to fund your business journey. Showing your LLC as a true business entity can help you receive the funding you need. Additionally, banks will want to see that you’re a real business if you would like to start a business bank account. Lastly, it can help set plans for what to do in the event of your death, you become incapacitated, and how you will handle different situations should they occur. 

2. Management Structure

Next, an Operating Agreement should touch on the rights and duties of managers. In this section, members of an LLC should explain the management structure. As stated earlier, an Operating Agreement can help avoid future fights. Clearly outlining the roles of managers and which members are considered managers can do the same. All in all, an Operating Agreement should describe your basic business structure.

3. Business Activities and Affairs

According to the Code of the District of Columbia, the Operating Agreement may cover the activities and affairs of the company and how to conduct those activities and affairs. Essentially, this means that an Operating Agreement can explain the purpose of your business and the day-to-day activities that might take place.  

4. Conditions to Amend the Operating Agreement

The District of Columbia also notes that the Operating Agreement may govern the conditions for amending the Operating Agreement. An LLC might amend the Operating Agreement if a member chooses to leave the LLC or a new member joins. It’s important that the initial members of the LLC sit down and note their personal regulations for amendments. 

The basic regulations may include:

• An amendment cannot be adopted if all required individuals do not approve. 
• The Operating Agreement regulates the members, dissociated members, transferees, and managers.

Drafting an Operating Agreement with ZenBusiness

Now that you’ve decided to bring your business dreams to life, you have to come back down to earth to file paperwork. At ZenBusiness, we know what a nuisance this can be, especially when you are still growing your business. Our goal is to help small businesses follow their dreams and develop to their fullest potential, which is why we offer several affordable plans for filing services and support to meet your LLC’s unique needs.

Updating and Revising Your District of Columbia LLC Operating Agreement

Once members create and sign the District of Columbia Operating Agreement, it is active. The LLC should store this document with other business records. An Operating Agreement is not filed with the state, but it should be part of your core business records. 

Luckily, members of the LLC can make modifications and update the Operating Agreement when necessary. By default, in D.C., all members will need to approve any changes to the document unless noted differently in the original Operating Agreement. Changes are quick and can be completed with signatures from the required individuals. 

If you’re wondering when to revise your Operating Agreement, you should make a habit of reviewing it when you review other key items like your registered agent and when filing your biennial report.