An operating agreement is a contract between the members of an LLC. It details financial rights and obligations, along with the duties and rights of managers. Most states require one, but Wyoming does not. So the question becomes should you have one?

The answer is that it depends. Single member LLCs may sometimes need one, but in those instances they should be careful about what it says. More on that in a moment. For multi-member or professionally managed LLCs the answer is an unequivocal yes. We share horror stories at the end.

If you form your LLC with us we provide an operating agreement which differs depending on whether there is one or multiple owners and whether you form a close llc. When the time comes to add a new member or for you to leave, view our page on buy and sell agreements for LLCs. Shareholder bylaws function as the "operating agreement" for corporations.

For a single-member LLC

An operating agreement is sometimes considered superfluous since it’s simply an agreement between you and yourself. You may amend or disregard it at anytime. We still supply one for two important reasons:

  1. 1) For the “springing member” provision and transfer of membership interest testament.
  2. 2) Banks frequently ask for them.

The springing member provision ensures a smooth transition in case of your death. Almost every person who owns an LLC would like his or her spouse, family or loved ones to inherit the company when they die. Unfortunately, few LLC owners plan for death and the orderly transfer of their LLC ownership to their desired heir(s). The named person(s) will receive your membership interest via a smooth transition process.

The transfer can be simple (the LLC is owned by a trust or the owner signed a Transfer of Membership Interest Testament) or the transfer can be a time consuming, expensive and private details enter the public record due to being probated.

Imagine your company's bank account.  The bank will refuse to give control of the account to the deceased’s heirs.  The rightful heirs will require an attorney, thousands of dollars and often more than a month to become appointed the personal representative of the estate. Beyond added expenses, this could starve the company of needed cash. Do your loved ones a big favor and plan for your death so you will know for sure that your desired heir(s) inherits your LLC automatically without the need for a probate. 

The second reason is banks and other institutions often require you to have one. However, you will also notice the agreement we provide is relatively sparse, especially when compared to the multi-member agreement. Why is this?

There may come a day where the company is sued or faces another credit event. If your operating agreement goes into detail about best practices for accounting, finances, risk management and more, then it will be easier to hold you accountable if you fall short in one of those areas. It would be hard to claim you didn’t know better if it was in the operating agreement you signed.

This is why we strip out talk of best practices in the single member agreements. Should you fail to properly segregate business and personal accounts, or not keep perfect receipts, then you will have plausible deniability. For more information about single member limited liability companies click here.

For a multi-member LLC

There is no reason not to have one. We suggest you have all members sign and then upload the document to your portal for secure storage. The agreement accomplishes several things:

 

Declares ownership interests.
Your articles of organization do not declare the owners of the LLC. We know the owners, but do not maintain ownership percentages at any time. Never formally declaring who owns how much makes for future problems if there is not 100% agreement. How often is there 100% agreement on anything? More on this below.

Defines the scope of management’s powers (for manager-managed LLCs).
The operating agreement states what actions a manager must seek Member approval for. For example, managers can often be prevented from buying and selling assets, assuming loans or signing contracts.

Prevents disclosure of sensitive information.
If a Member does not sign an agreement limiting disclosure, then the Member is free to share any information they want with anyone they want.

Restrictions on share transfers. (Doesn’t apply to Close LLCs)
There are legitimate reasons to limit the ability of other Members to sell their shares. Imagine discovering your partner has sold his stake, without consulting anyone, to a previously unknown third party. This third party now has voting and economic rights to the company.

You may want to consider adding restrictions on transfers and a provision that gives the company a first right of refusal to acquire the interest a member desires to transfer on the same terms and conditions applicable to the proposed transfer.  Other members should have a second right of refusal if the company does not exercise its first right of refusal.

Following up on ownership interests, Wyoming LLCs have no minimum capital contributions. Nor are Members required to make any contributions. (This is just one of many benefits Wyoming LLCs offer - click here to learn more.) This means Members must agree in writing regarding their contributions or you will be left with little to no recourse should they not. In our experience, if members do not state contribution requirements in the begining, then the agreement is unlikely to ever be codified in writing.

An easy example of this happening is two individuals purchasing a home. One individual takes out the loan and the second party is not named on the loan documents. The property either loses value, faces a lawsuit or sees its payments rise. In either case, the cash flow from the property becomes negative and the second party quits contributing funds. However, the first party is still liable for the entire loan, not just their share.

Agreeing in writing to contributions mean the first party could sue for breach of contract and hold the second party liable. Not agreeing means the first party has no recourse. How else can you prove what everyone agreed they would or wouldn’t be liable for?

Summary

Operating agreements are integral to the smooth running of your Limited Liability Company. From ensuring members agree to allowing for a smooth transition after your death. In our experience, if members do not sign an agreement in the first thirty days, then it is never signed. This can create major headaches, including the blurring of membership interests. You may contact us about a custom operating agreement or modify the complimentary one provided with your LLC.

Related Reading