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Drafting a Delaware LLC operating agreement for your business is a safe way to navigate the challenging, unpredictable, and overlapping laws of business.
To help you understand the foundations of an operating agreement, we sought the help of our LLC-savvy attorneys leveraging decades of experience in the business sector.
We also dedicated three weeks to finding out how to write one from the ground up.
Here's everything you need to know about the Delaware LLC operating agreement.
Disclaimer: This template is offered for informational purposes only and is not intended as legal advice. We highly advise consulting a qualified attorney to confirm its suitability and accuracy for your specific needs. We assume no responsibility for any consequences arising from the use of this template.
We recommend reading our comprehensive article on the essential differences between member-managed and manager-managed LLCs before downloading our template.
A Delaware LLC operating agreement is a written agreement that establishes the rules governing the limited liability company.
The agreement outlines the LLC's objectives, operations, management, and provisions regulating the rights and obligations of its members.
Operating agreements benefit both multi-member and single-member LLCs.
For a single-member LLC, the agreement distinguishes between LLC operations and those of the owner, while multi-member LLC operating agreements include initial capital contributions, member responsibilities, and structural elements [1].
To write a Delaware operating agreement, you must gather all the LLC basic information, use a pre-structured form, or consult an attorney to draft the agreement from scratch.
Here are the important steps you must take when writing a Delaware LLC operating agreement:
The first step when drafting a Delaware LLC operating agreement is to define its ownership.
The operating agreement should explicitly identify the owners of the business. Include their initial capital contribution and their proportion of ownership in the company.
Under ownership, the agreement should also specify distributions. The operating agreement may specify how and when distributions will be made and how and when economic gains and losses will be distributed among the members.
Distribution amounts and schedules may be decided upon at the management's discretion, mandated at predetermined intervals, or brought about by specific occurrences.
After setting up ownership, you should outline a management structure.
The limited liability company agreement should outline the management structure and be explicit about what is required to qualify as an LLC activity to avoid depending on default state laws.
Common management-related clauses in an LLC operating agreement include:
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The agreement should also outline the rights, obligations, and benefits of LLC members. This section should describe every member's rights and performance in the company's daily operations.
The agreement should also include voting rights, meeting requirements, and procedures.
Talk about who will be in charge of taking minutes, taking notes, or participating in special projects. Explain the voting method and the votes each member receives during any significant decision-making process.
A member's ability to transfer their limited liability company interest should be outlined in the LLC operating agreement.
Similarly, the operating agreement may specify the procedure and acceptable grounds for a member's removal from the LLC before cancellation.
You must also include a right of refusal under a transfer of membership interest.
"A right of first refusal is frequently triggered by a permitted transfer or withdrawal, allowing the other members to purchase that particular interest under the operating agreement's conditions."
- Michelle Quinn, Limited Liability Company Attorney
You must also agree on what should transpire if the firm is dissolved.
Give specific instructions on the administrative steps managing members should take in this situation and what they should do with the company's assets.
The agreement should also conclude with a severability provision. A severability provision guarantees the validity of the other conditions, even if a specific phrase is invalid or unenforceable.
This clause ensures that the agreement will be generally enforceable and effective.
You need an LLC operating agreement in Delaware to maintain your personal assets separate from those of the LLC and open an LLC bank account.
Here are additional reasons why you need a Delaware LLC operating agreement.
An operating agreement enables you to build a structure that demonstrates your commitment to maintaining the assets separately and allows you to secure yours from your company's assets.
This is crucial for multi-member LLCs as you want to protect your assets from another member's actions by limiting your liability to the business alone.
To protect the limited liability status, Delaware LLC must state its liability protection in the LLC operating agreement.
Most states have default laws that specify how an LLC should function and be treated legally in cases when it lacks an operating agreement.
As a basic framework, these default regulations apply to LLCs. Delaware's default LLC law is the Delaware Limited Liability Company Act [2].
A Delaware LLC can, however, diverge from these default guidelines and exercise greater autonomy over defining and regulating its operations by drafting its operating agreement.
With the help of an operating agreement, an LLC can create its own set of unique policies, guidelines, and clauses better suited to its particular requirements and circumstances.
It gives the LLC the freedom to modify how it makes decisions and distributes profits, among other crucial features, per the preferences and agreements of its members.
An operating agreement LLC is necessary to address the particular procedures and operations of an LLC, such as voting, meetings, communication, and dispute resolution.
A solid operating agreement ensures everyone is on the same page and provides comprehensive clarity regarding the company's intentions, enabling firms to expand.
A domestic and foreign limited liability company benefits from a structured framework that encourages adherence to these rules by all members by clearly establishing internal procedures through an operating agreement for an LLC.
The Delaware LLC operating agreement gives specific instructions for the daily management and governance of the LLC, ensuring smooth operation and reducing the possibility of disagreements.
Many entities frequently view a professional operating agreement LLC as a dependable sign of a reliable company.
A well-structured and efficient agreement shows that a business is proactive in organizing and conducting business legally.
It shows that the LLC is conscious of its legal responsibilities, deliberate in choosing its organizational structure, and ready to face difficulties in the future.
Verifying a company's reliability and expertise is crucial to lending institutions, particularly banks.
In some circumstances, they may even demand an operating agreement LLC to register a bank account.
Is an Operating Agreement Required in Delaware?
No, an operating agreement is not required in Delaware. However, it's best to have an operating agreement to avoid default Delaware state laws from overriding your LLC.
Do I Have to File My Operating Agreement in Delaware?
No, you don't have to file your operating agreement in Delaware. If you have one, you should issue signed copies to every member and keep it internally with company records.
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About The Author
Education: Northwestern University Pritzker School of Law Lives in: IllinoisAs a corporate attorney, Danya supports entrepreneurs in having successful businesses by building strategic relationships, assisting in transactions, and protecting their companies.
After over a decade of experience, she has helped several organizations get their deals done so they can focus on their dreams.
As a firm, Motiva Law not only provides excellent legal services – it delivers a top-quality client experience by being communicative and providing an easy-to-understand strategy for their clients' business deals. In other words, they handle the legalese so the clients don't have to!
Accreditations: Being selected as a "Rising Star" by Super Lawyers from 2015-2024. This award goes to less than 2.5% of attorneys in Illinois.
