What is a Delaware LLC Operating Agreement?
At the initial stage, the members of a newly formed Delaware LLC will have the ability to use the Operating Agreement in order to arrange the affairs of the LLC however they wish. The aspect in which an LLC is organized will be fully spelled out within the Delaware LLC Operating Agreement. This initial agreement formed among the LLC members will set forth the operating procedures, ownership, and general management of the LLC.
Here are some of the essential aspects that one needs to know regarding a Delaware LLC Operating Agreement
Private Document Delaware is a state that does not require you to file the LLC Operating Agreements publicly, nor will it require a listing of all management and members. Therefore, the original document should be filed safely away and all members should retain a copy.
Written Form While the Delaware LLC Act implies that an Operating Agreemnet may take the form of an implied, oral, or written document, the only enforceable document is one that is legally written. Delaware Courts will enforce a Delaware LLC Operating Agreement that is written. LLC Formations is available to create a proposed LLC Operating Agreement with the majority of their service packages. This document can be modified to your specific needs before signing.
A Business Bank Account May Be Needed For verification of “Signing Power” of the LLC, many financial institutions will require a copy of the Operating Agreement as well as the Federal Tax identification Number or EIN in order to open a business bank account.
Updated On A Regular Basis If members desire to change the ownership structure or agreement, an amended and restated LLC Operating Agreement will need to be drafted and signed for each time the agreement changes. LLC Formations has the ability to assist your LLC with the changing of members.
Understanding the Role of the Delaware LLC Operating Agreement
While the primary concern of a Delaware LLC Operating Agreement is to set forth the management and ownership structure, it must also be able to provide an essential solution to common concerns and problems in an effort to avoid litigation.
A well-drafted Operating Agreement will act as a form of a prenuptial agreement, as it will help to avoid the majority of partnership disputes that typically arrive as members decide upon different directions. This will allow for everyone to understand the general expectations from the very beginning and avoid any potential problems. From our experience, we have noted that the vast amount of problems with an LLC all form from simple owner disagreements. The Operating Agreement will help to assist with those problems well in advance of later situations.
This should document ownership percentages, fiduciary duties, management structures, and capital contributions. Additionally, it should focus on valuation formulas, tax matters, transfer restrictions, and buy-out rights. All of the members of the LLC must agree to the Operating Agreement terms for them to be considered binding.
The provisions Should Include:
LLC Ownership – this should include who all of the LLC members are, if there are various voting rights between members, and the total amount of units that are owned by the various members. Many times the LLC Operating Agreement will have two distinct classes of interests that include non-voting and voting.
Voting Rights – The interests of the company can be separated via non-voting and voting units from separate ones into those that make the decisions for the company and those that are passive investors.
Capital Contributions – What must understand what type of consequences there are if a member was to fail with their initial capital contribution or simply failed in upkeeping subsequent capital calls.
Management Structure – This will assist in understanding if the LLC is to be run by the members, non-executives or a form of hybrid control that will allow for a form of management by both allowing for the firing of the manager by voting members.
Transfer Of Interest – Will specify if a member is able to transfer interest to another individual and what restrictions would be placed on such a transfer.
Member Withdrawl – These are the terms for which a member would be allowed to leave the LLC and what happens to their interest upon leaving in addition to the terms if they were to die or become incapacitated.
LLC Wind Down – Understanding the events that would trigger the dissolution and cancelling of the LLC as well as how the final winding down of the company would be handled.