LLC Operating Agreement

Limited liability companies (LLCs) are permitted to be formed in all 50 states upon the filing of Articles of Organization with the Secretary of State. Many states provide a form for this purpose. Single-owner LLCs are permitted in all 50 states.

LLCs are similar to corporations in that, if properly formed and maintained, they provide limited liability protection for their owners’ personal and other business assets; however, their owners are called Members instead of shareholders, they are formed with Articles of Organization instead of Articles of Incorporation, governed by an LLC Operating Agreement instead of bylaws, and they have pass-through income tax treatment (that is, the profit or loss from the LLC’s business is reported on the owners’ tax returns). Pass-through taxation makes LLCs a frequent choice for real estate investors.

Once formed pursuant to the Articles, however, the LLC risks uncertainty of management and undesirable double taxation as a corporation without the adoption of an Operating Agreement by the owners of the LLC, who are called Members. Some states require LLC Operating Agreements.

An LLC Operating Agreement specifies the rights and duties of the Members; how the LLC will be managed; what number of votes is required for a particular action; who gets what share of the profits and losses; what to do in the case of a dispute; when, how, and for what price a Member can sell his ownership of the LLC; when and how the LLC can be dissolved; and the like.

Unless the LLC Operating Agreement specifies otherwise, no annual meeting is required (unlike a corporation). Many states require annual filings, however, and of course applicable tax returns must be filed, as well. Generally, a one-person LLC is disregarded for federal income tax purposes, that is, the profit or loss of the LLC is reported on the owner’s personal income tax return, while a multi-Member LLC is generally taxed as a partnership. Partnerships file Internal Revenue Service Form 1065. If an LLC wishes to be taxed as a corporation, which usually it will not, it should file IRS Form 8832 and consult a CPA.

This LLC Operating Agreement is appropriate for use by small LLCs; those with corporate Members, large numbers of Members, or other complexities should consult with a business attorney to determine if this Operating Agreement is appropriate for their needs.

Once the blanks are filled in, Schedule A is completed, and the Operating Agreement is signed by all of the Members, the original of the Operating Agreement should be kept with the LLC’s official records, and each Member should receive a copy. Do not file the LLC Operating Agreement with the Secretary of State.