Forming a Delaware LLC takes a lot of planning. Between the Certificate of Formation, business licenses, franchise taxes, and more, there’s a lot to consider. And paperwork and 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 state.
That’s where the LLC operating agreement comes in.
Time-Saving Hack: There are a handful of LLC set up websites that can form an LLC for you and also offer a customizable operating agreement. ZenBusiness and Northwest are two great examples of this.
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 Delaware?
The Delaware Department of State does not mandate that your LLC maintain an operating agreement. But because it can be extremely beneficial to the stability and success of your company, we strongly recommend it.
Would you like your LLC to run smoothly and successfully? Do you want it to have legal protection in potential disputes? Do you want every member and manager to understand your LLC’s standardized procedures? Then you will want to create an operating agreement.
Benefits of Creating an 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 Delaware’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 Delaware courts.
Free Delaware LLC Operating Agreement
The Delaware Department of State, however, does not provide access to an official operating agreement form. This is because it’s optional and highly customized to each LLC.
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 free through an affordable LLC service like ZenBusiness or Northwest Registered Agent.
Whether you’re using a template or starting from scratch, here’s a quick and easy guide for what to include:
Owner or Member Information: Names and mailing addresses.
Company Information: Your LLC’s name, registered office, and principal office.
Registered Agent Information: The name of your registered agent, their address, and contact information.
LLC Formation: The date you filed or will file your Certificate of Formation with the Department of State.
Business Purpose: The type(s) of business your LLC will be doing in Delaware.
Term: How long your LLC in Delaware 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 or 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, 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. 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.
After you’ve finished your draft, review it to make sure you’ve covered every business procedure you want to be defined. You’ll want to run it by all of your LLC’s members to get their approval. Then, place your operating agreement among your other business files. You don’t need to submit it to the Secretary of State, but save it for future reference and revisions.
Making Changes to Your Operating Agreement
For better or worse, your business is going to change. As you begin doing business in Delaware 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 updating 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 Delaware 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 Delaware 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’ll 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.
The Delaware LLC Act provides some general guidelines for how an operating agreement should function.
Section 18-101 states that “a member or manager of a limited liability company or an assignee of a limited liability company interest is bound by the limited liability company agreement,” and that the LLC itself is bound by the agreement as well. This means that an LLC’s operating agreement can define its business activities and procedures, and then the company is bound to those definitions. Likewise, it can dictate the duties, rights, and actions of members.
The operating agreement may not, however, override state or federal law. It may not authorize LLC or member actions that contradict the law, nor can it give the LLC immunity against state penalties. It cannot, for example, prevent your LLC from losing its charter for failing to maintain a registered agent.
Additionally, anything not covered in the operating agreement will be subject to the state’s default laws. If your agreement doesn’t direct the distribution of assets after dissolution, the state will make that decision. If your agreement doesn’t explain how decisions are made, it must abide by the state’s rules. And so on.
When drafting your operating agreement, be sure not to overstep Delaware’s boundaries and make it as detailed as possible, and you’ll be good to go!