Q: What is an LLC operating agreement, and what provisions does it typically include?
A: An operating agreement outlines the internal affairs and governance of a limited liability company, akin to the bylaws of a corporation. An operating agreement is not required under New Hampshire law, but without one, the LLC statute sets the default rules that your company must follow, which may not reflect your desired structure. An operating agreement takes priority over the default rules and gives you the ability to decide what is best for your business.
An operating agreement will typically include provisions regarding management, membership (ownership), and voting rights. Owners of an LLC are referred to as “members” and an operating agreement will outline members’ rights and responsibilities. The operating agreement will also indicate whether the company is member-managed or manager-managed. In a member-managed LLC, the members are responsible for decision-making and day-to-day business operations. In a manager-managed LLC, the members elect one or more managers who are responsible for running the business. An operating agreement should also outline voting rights. For example, should all members have an equal say? Or should they vote proportionately based on their respective percentage of ownership?
An operating agreement should also outline requirements regarding tax matters, capital contributions, distributions to members, and how profits and losses will be allocated among the members. Capital contributions are money or other assets that a member contributes to the company in exchange for ownership interest. An operating agreement will typically record the initial capital contributions made by members when the LLC is formed and may allow the company to require additional contributions as needed to fund the business.
Another important topic to be addressed in an operating agreement is restrictions on transfer of ownership. Should members be able to sell or transfer their membership interest to anyone, or only to certain parties such as family members? If a member wants to leave the business, should the other members have the first opportunity to buy them out? What happens to a member’s ownership interest if they die or become incapacitated? In addition, an operating agreement will typically outline circumstances under which the LLC should be dissolved, and the process for winding up the business. These are important considerations to address at the outset in order to avoid conflicts in the future.
The LLC is a flexible business structure and the operating agreement is highly customizable depending on the needs of the business and its members. Although the provisions discussed above are standard considerations for most operating agreements, there may be other provisions worth including in your operating agreement that are unique to your business needs. Consult your attorney for guidance in crafting an operating agreement that works for your business.
Know the Law is a bi-weekly column sponsored by McLane Middleton. Questions and ideas for future columns should be emailed to knowthelaw@mclane.com. Know the Law provides general legal information, not legal advice. We recommend that you consult a lawyer for guidance specific to your particular situation.