LLC Operating Agreement Template

Required by statute in California (Corp. Code §17701.10 — may be oral), New York (NY LLC Law §417 — must be written, within 90 days of formation), Maine, and Missouri. Delaware (6 Del. C. §18-201(d)) does not require an operating agreement but explicitly recognizes them and permits oral agreements. Even where not legally required, an operating agreement is essential — without one, state default rules govern, and those rules rarely match the parties' intent. Default profit allocations in some states are per capita rather than pro-rata; default voting may require unanimous consent on matters you would want by majority; default rules on member withdrawal may permit forced dissolution. Banks require an operating agreement to open business accounts; investors require one as a condition of investment.

Member-managed: all members participate in management and have agency authority to bind the LLC for ordinary-course matters. Best for small, owner-operated LLCs where all members are active. Manager-managed: one or more Managers (who may or may not be members) run the LLC; non-Manager members have no agency authority. Best for LLCs with passive investors, professional management, or board governance. Choice is declared in the Certificate of Formation / Articles of Organization; changing it requires an amendment. Manager-managed is near-prerequisite for any LLC intended to take outside investment, because investors do not want non-investor members to have agency authority to bind the LLC.

Standard real-estate / fund waterfall: (i) return of capital — distributions go pro-rata until each member has received its capital contributions back; (ii) preferred return — pro-rata until each member has received a cumulative 8% (or other agreed rate) annual return on contributed capital; (iii) sponsor catchup — entirely to the sponsor until the sponsor has received 20% of all distributions made after return of capital (overall split equals 80/20 LP/GP after this tier); (iv) promote — remaining distributions split 80/20 LP/GP. Multi-tier ("hurdle") waterfalls add preferred-return hurdles with escalating promote (e.g., 70/30 above 15% IRR, 60/40 above 20% IRR). These are technical — §704(b) substantial-economic-effect compliance is non-trivial — engage tax counsel.

A drag-along right lets majority members force minority members to sell their interests in a sale of the LLC. Without it, a small minority member can block a sale by refusing to sell — extracting holdout value disproportionate to ownership. Drag-along is triggered by a third-party offer for the entire LLC meeting defined criteria (sale of 75%+ of the LLC at a sale price above a stated floor); the dragged minority gets the same price per unit and same form of consideration as the majority. Drag-along is paired with tag-along (the minority's right to participate in a majority's sale on the same terms) — together they give the majority sale flexibility and the minority co-sale protection. Essential in any LLC that may eventually be sold.

Delaware (6 Del. C. §18-1101(c)) is uniquely permissive — the operating agreement can eliminate fiduciary duties (duty of loyalty, duty of care) of members and managers, subject only to the implied contractual covenant of good faith and fair dealing (which itself cannot be eliminated). Other states are more restrictive: California Corp. Code §17704.09 permits modification but not elimination. For sponsor-led real-estate or fund LLCs, fiduciary duties are commonly eliminated so the sponsor can participate in competing projects without conflict-of-interest analysis. For operating businesses with multiple active members, fiduciary duties should generally not be eliminated — the result is partners with no duty to each other beyond contract.

The Bipartisan Budget Act of 2015 (effective for tax years beginning after December 31, 2017) replaced the "Tax Matters Partner" regime with a Partnership Representative (PR) under IRC §6223. The PR has sole authority to bind the LLC in IRS audits, settle audit adjustments, and bind both current and former members. Critical: (i) the LLC itself (not the members) is liable for audit-adjustment tax under IRC §6225 unless it elects out (only available for LLCs with ≤100 eligible members, election made annually on Form 1065); (ii) the PR's authority is plenary unless limited by the operating agreement; (iii) audit adjustments are imposed at the highest applicable tax rate unless the partnership files a "push-out" election under IRC §6226 transferring liability back to the reviewed-year partners. Every operating agreement signed after January 1, 2018 should designate the PR, limit material-settlement authority, and provide for cost allocation among current and former members.

Form in your operating state unless there is a specific reason for Delaware. A Delaware LLC operating in California pays Delaware franchise tax ($300/year) PLUS California foreign-qualification PLUS California minimum franchise tax ($800/year). Delaware is worth the cost when (i) the LLC may take outside investment from institutional investors (who often require Delaware), (ii) the parties want access to Delaware Court of Chancery's developed LLC jurisprudence, or (iii) the parties contractually rely on Delaware-only protections (especially §18-1101(c) fiduciary-duty elimination). For single-state owner-operated LLCs, form in the operating state; the legal sophistication of Delaware's statutes is not worth the dual franchise tax exposure.