²ÊºçƵµÀ Operating Agreement & Templates
For many entrepreneurs, forming a Delaware Limited Liability Company (²ÊºçƵµÀ) is an easy choice due to its flexibility and strong legal protections. However, forming your ²ÊºçƵµÀ is just the first step of many. Without clear operational guidelines, even the most promising ventures can run into confusion or conflict. As such, your Delaware ²ÊºçƵµÀ operating agreement will help build a solid foundation for roles and decision-making in the company for years to come.
What Is an ²ÊºçƵµÀ Operating Agreement?
A Delaware ²ÊºçƵµÀ Operating Agreement sets forth the terms governing the limited liability company, its interests, activities, management, and provisions governing the rights and obligations of its members. While not always required by law, an operating agreement is the main governing document of the ²ÊºçƵµÀ, above all others.
Do I Need an Operating Agreement for My ²ÊºçƵµÀ?
A few states mandate ²ÊºçƵµÀs to have an operating agreement, but Delaware is among the states where operating agreements are not mandatory. Even in states where one isn't required, having an operating agreement is still highly advisable to set the guidelines for how the ²ÊºçƵµÀ will run.
The Delaware legal premise known as freedom of contract gives the organizers of the ²ÊºçƵµÀ, who set the ²ÊºçƵµÀ's terms and oversee the drafting of the Operating Agreement (among other powers and duties), enormous flexibility in defining the rights and responsibilities of the ²ÊºçƵµÀ members. This means the ²ÊºçƵµÀ Agreement will allow you to create an entity as well as define the relationship among its members as you see fit for your unique situation. The ability to draft your own rules and guidelines through the ²ÊºçƵµÀ Operating Agreement is one of the most significant advantages of a Delaware ²ÊºçƵµÀ, causing over 70% of entrepreneurs to create an ²ÊºçƵµÀ over any other business entity.
Since the ²ÊºçƵµÀ Operating Agreement is a contract, it must be agreed to by all participating parties. While Section 18-101 of the Delaware Limited Liability Company Act states that a limited liability company Operating Agreement may be "written, oral, or implied," typically people write out the Operating Agreement and have it signed before a notary public, with a copy of the notarized document provided for each signer. Having a hard copy of your ²ÊºçƵµÀ Operating Agreement will also allow you to refer back if there are any questions or disputes.
Oftentimes, business partners or investors in the first stages of an exciting business opportunity will not foresee (or do not consider) the possibility of a later disagreement and the potential need to assert their respective rights. However, putting the terms governing the operations of an ²ÊºçƵµÀ in writing clearly and explicitly at an early stage will protect the interests of everyone involved. Many difficult cases have been decided based on default rules or judicial interpretation of an ambiguous agreement that did not seemingly reflect the wishes and goals of the parties.
Parts of an Operating Agreement
While a Delaware ²ÊºçƵµÀ Operating Agreement doesn’t have a specific format, there are a few sections that you’ll commonly find:
- Basic organizational details - Includes the ²ÊºçƵµÀ’s name, formation date, place of business, etc.
- Ownership details - Lists the members and their ownership percentages
- Profit and Loss Allocation - Explains how profits and losses are distributed
- Voting Rights - Defines voting power and procedures for major decisions
- Dissolution Plans - Outlines how the ²ÊºçƵµÀ will be dissolved and how its assets will be distributed
Do Corporations Have Operating Agreements?
No. Corporations do not have Operating Agreements. Instead, corporations have corporate bylaws. Bylaws are more or less the equivalent of the Operating Agreement, as they outline the internal rules and procedures of the company. Bylaws typically cover matters such as the officer roles and responsibilities, shareholder rights, voting procedures, procedures for holding meetings, and more.
Aside from the different entity types, one of the main differences between an Operating Agreement and corporate bylaws is the flexibility of the Operating Agreement. Corporate bylaws are more formal, and demand that the company follow strict legal requirements laid out within.
If you’re more interested in creating corporate bylaws for your Delaware Corporation, you can learn more and find a template on our website.
Creating Your Own Operating Agreement
While there are multiple operating agreement templates available below, you can also choose to draft your own from scratch. Some of the things you may want to include are company roles, ownership structure, voting rules, and cancellation procedures. Be sure to review some of our templates below to get a better idea of how to fill in the agreement.
While there’s no universal formula, most of the talking points on a Delaware ²ÊºçƵµÀ Operating Agreement have some overlap from business to business. For example, including some language about the key members, their rights, and guidelines for joining and departing from the company are all commonplace. It’s also worthwhile to answer questions about the future of the company. How will assets be divided if the company gets dissolved? How can members change the Delaware ²ÊºçƵµÀ Operating Agreement in the future?
Once implemented, a Delaware ²ÊºçƵµÀ Operating Agreement will remain in force until amended or changed by the unanimous consent of the ²ÊºçƵµÀ members, unless the Agreement itself states an expiration date.
How to Amend an Operating Agreement
If your business undergoes major changes, such as adding or removing members, you may need to update your ²ÊºçƵµÀ Operating Agreement. In Delaware, the amendment process is typically governed by the terms outlined in your existing Operating Agreement. In many cases, members must approve the changes through a vote or written consent, depending on what the agreement requires. The level of approval needed can vary, with some agreements requiring a majority or supermajority rather than unanimous consent.
Once approved, amendments can either be added as a separate document (an amendment) or incorporated into a fully restated Operating Agreement. After the updated terms are finalized and agreed upon, they become effective according to the terms of the amendment.
Delaware does not require ²ÊºçƵµÀs to file Operating Agreement amendments with the state or notify a registered agent, making the process relatively simple and private.
Does an Operating Agreement Need to Be Notarized?
No, your Operating Agreement does not need to be notarized. Your Delaware ²ÊºçƵµÀ Operating Agreement is your company's personal property and is not required by the State of Delaware to be filed publicly.
Typically, the IRS also does not require that you publicly file your ²ÊºçƵµÀ Operating Agreement with your annual tax forms, or to obtain an Employer Identification Number (EIN). However, a bank may require a copy of the ²ÊºçƵµÀ Operating Agreement and an EIN if you wish to open a bank account for your Delaware ²ÊºçƵµÀ.
You may form your Delaware ²ÊºçƵµÀ before you have established an Operating Agreement, or you may write an Operating Agreement and then form your Delaware ²ÊºçƵµÀ. Either is permissible.
Below, Harvard Business Services, Inc. has prepared several free ²ÊºçƵµÀ Operating Agreement templates for you to download and use at your discretion. Check out five of our ²ÊºçƵµÀ agreement outlines, including our multi-member ²ÊºçƵµÀ Operating Agreement templates and single-member ²ÊºçƵµÀ Operating Agreement template for free. Feel free to use as much or as little of this language if you'd prefer to draft your own Delaware ²ÊºçƵµÀ Operating Agreement.
Types of ²ÊºçƵµÀ Operating Agreements and When to Use Them
Depending on the type of ²ÊºçƵµÀ you’re managing, there should be slight adjustments to the contents of your ²ÊºçƵµÀ Operating Agreement. Below, we’ve listed a few of the intricacies of different ²ÊºçƵµÀs and their associated Operating Agreements.
Single-Member ²ÊºçƵµÀ Operating Agreement
An Operating Agreement is not required in a single-member ²ÊºçƵµÀ, but most attorneys recommend you have one that is signed and dated by the primary member (owner), just as a formality.
There are provisions you can build into a single-member ²ÊºçƵµÀ Operating Agreement that protect the member beyond the liability protection outlined in the Delaware code. A legally executed ²ÊºçƵµÀ Operating Agreement becomes very important if the sole member of an ²ÊºçƵµÀ dies.
In your Delaware ²ÊºçƵµÀ Operating Agreement, you may, but are not required to, include language that excludes others from ever becoming members. In the case that an ²ÊºçƵµÀ Operating Agreement mentions nothing about the number of members, then the law assumes there is at least one member, and you are free to add as many other members as the ²ÊºçƵµÀ desires. This is because there is currently no limit on the number of members you may have in a Delaware ²ÊºçƵµÀ.
Download: (.doc file)
Multi-Member ²ÊºçƵµÀ Operating Agreement
Multi-member Operating Agreements are applicable to manager-managed and member-managed ²ÊºçƵµÀs. In the case of member-managed ²ÊºçƵµÀs, the multi-member Operating Agreement typically puts the members themselves in charge of the operation of the ²ÊºçƵµÀ, with decisions made by a vote either per person or based on percentage interests.
The ²ÊºçƵµÀ owner (or owners) may customize this document to assign specific, unique responsibilities to each member, or to require members to accept certain rights and responsibilities. It may provide for any terms not deemed void as illegal or against public policy. This Agreement is often used in family businesses, joint ventures between companies, and investment vehicles for groups of investors.
For example, some situations might call for one member to have ultimate authority over bank accounts, or the ultimate power to bind the company by contracting with others.
The Delaware ²ÊºçƵµÀ Operating Agreement may also provide for the establishment of committees or groups of members with specific rights or management responsibilities.
In manager-managed ²ÊºçƵµÀs, the multi-member Operating Agreement establishes the operation of the company to be led by one or more third-party managers who are member-selected but not members themselves.
You may decide to elect, appoint, or contract with a manager for these services. You may also set in the ²ÊºçƵµÀ Operating Agreement any limitations on the manager you deem appropriate.
Download:
- (.doc file)
- (.doc file)
Multi-Member Delaware ²ÊºçƵµÀ Operating Agreement with Three Member Classes
One of the most sophisticated structures for an ²ÊºçƵµÀ in Delaware is the multi-class structure.
By dividing members into different classes, you can assign unequal rights and responsibilities to separate groups of members. Each of the classes can be structured with variable economic, reporting, voting, or other rights.
A multi-class Operating Agreement can be customized to include the names of the specific members in each class, as well as their designated rights. The specific provisions that outline limits on power, responsibility, and governance, and all other pertinent ²ÊºçƵµÀ details, can be devised by the founder(s) of the ²ÊºçƵµÀ according to the Delaware ²ÊºçƵµÀ freedom of contract precept.
In order to take advantage of this feature of the Delaware ²ÊºçƵµÀ, you must specify in the ²ÊºçƵµÀ Operating Agreement each class you wish to remain separate, and delineate each class's individual rights and privileges, including any denied rights and privileges.
With this Delaware ²ÊºçƵµÀ Operating Agreement, there are no limits on the number of classes of membership.
This type of Operating Agreement is often used in estate planning or succession planning.
Download: (.doc file)
Note: This template uses estate planning as the basis for creating the member classes.
Protected Series ²ÊºçƵµÀ Operating Agreement
Delaware series ²ÊºçƵµÀs are used to manage multiple properties or assets under one ²ÊºçƵµÀ. Forming a series ²ÊºçƵµÀ in Delaware will separate each property as though each asset were a separate entity.
Delaware was the first state to adopt the Series ²ÊºçƵµÀ form, and recently, the state has adopted new, substantial rules governing this type of entity.
Provisions in Delaware law allow Delaware ²ÊºçƵµÀs to be divided into separate and distinct series that may each
- own, control and manage separate assets;
- have separate financial records;
- have separate members or management;
- pursue different businesses; and
- be protected from the financial condition of any of the other series.
These series are divided into protected series and registered series. The choice between these types of series will have significant implications. Those interested in the series ²ÊºçƵµÀ should review this description and, potentially, consult an attorney.
There is no limit to the number of series a Delaware series ²ÊºçƵµÀ may contain.
Learn more about how to form a Delaware series ²ÊºçƵµÀ, including the language required in the Certificate of Formation in order to delineate an ²ÊºçƵµÀ as a series ²ÊºçƵµÀ and to make the required filing to create a registered series.
Download: (.doc file)
Form an ²ÊºçƵµÀ & Draft an Operating Agreement Today
The ²ÊºçƵµÀ operating agreement helps to show who is who in the company and how the company is run on a daily basis. It also strengthens the ²ÊºçƵµÀ's limited liability status by demonstrating it operates as a separate legal entity.
All of our Delaware ²ÊºçƵµÀ Operating Agreement templates are completely free to download and edit to your liking. If you have any questions about forming an ²ÊºçƵµÀ, be sure to contact our team at Harvard Business Services, Inc., and we’ll help make the process quick and easy.
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