The LLC Operating Agreement - Keep it Simple

Here is a little known secret about limited liability company (LLC) operating agreements:  They are often more complex than necessary.  Pick up any "standard" operating agreement from the internet or elsewhere and you will see a lot of provisions incomprehensible to a mere mortal.  Most of these provisions deal with so called "special allocations" among members of the LLC.   "Special allocations" describes a scenario where members of an LLC share profits and losses of the LLC in percentages different from the percentage of ownership in the LLC.  When members of an LLC opt for special allocations, the corresponding operating agreement has to incorporate certain tax rules in order to pass muster with the IRS.

Example:  A and B each contribute $500 to the LLC and agree to share profits and losses of the LLC equally.  Result:  No special allocations.

A and B each contribute $500 to the LLC and agree that for the first two years A is to receive 70% of the profits and losses of the LLC and B only 30% of the LLC's profits and losses.  Result:  Special Allocations.

If you and your fellow members  share profits and losses of the LLC in proportion to your membership interests (i.e no special allocations), you don't need any complicated provisions dealing with  special allocations. 

If you need help with drafting an LLC operating agreement, you should contact a licensed attorney in your area.

Comments

[nelson]

do you need an operating agreement if you are the only member?

[bloggy]

As to the first question, no. As to the second, none comes to mind, but banks will want to see it when you open a business account.

[Mark Andersen]

Does the NYS Dept. of State require an LLC Operating Agreement to be filed with the Articles of Organization? Does any other entity require a copy of the Operating Agreement?

[Joe]

Good article... Is it possible to create a business unit, under the parent LLC, in which there are special allocations?

[Sam]

If an operating agreement was drafted but never signed by any of the members, can any be liable for breach of fiduciary duties?