What is a Delaware Operating Agreement

What is a Delaware LLC Operating Agreement?

An Operating Agreement is a document designed to safeguard owners' assets from actions taken by the LLC. In essence, it ensures the protection of your personal assets while you're a part of an LLC. Although Delaware allows LLCs to create Operating Agreements, it's not obligatory. If you opt to establish an Operating Agreement, ensure all LLC members provide written consent for the document.

One key advantage of Operating Agreements is the ability to deviate from Delaware's default rules. With an Operating Agreement, your LLC can bypass certain state-mandated guidelines and regulations. Additionally, it outlines the legal and financial aspects required to secure funding from investors and lenders.

Why Do I Need an LLC Operating Agreement in Delaware?

Beyond the legal requirement, an LLC Operating Agreement offers substantial benefits and protection for your Delaware LLC. The U.S. Small Business Administration (SBA) strongly recommends having an Operating Agreement for the added safeguards it provides. The Operating Agreement is a formal contract binding all members to its terms, even in a single-member LLC, where it establishes the business as a separate entity from the owner, which can be crucial in legal matters.

Further benefits of having a Delaware LLC Operating Agreement include:

1. Establishing Limited Liability Status: While the LLC structure inherently separates the business from its owners, an Operating Agreement reinforces this separation. It demonstrates to the courts that you and the LLC are distinct entities, safeguarding personal assets in legal disputes.
2. Documenting Verbal Agreements: An Operating Agreement helps avoid misunderstandings by documenting business arrangements and operational conditions in writing.
3. Preserving Your Preferences: With an Operating Agreement, your LLC can deviate from state regulations, ensuring your business operates as you intend, including matters like member departures and other operational details.
4. Facilitating Business Banking: Many banks require an Operating Agreement before permitting you to open a business account. It also provides assurance to potential investors, financial professionals, and legal advisors that your LLC is well-structured.
5. Utilizing Ownership Flexibility: LLCs offer considerable flexibility in ownership and profit distribution. An Operating Agreement empowers LLC members to set ownership percentages based on mutual agreements.
6. Expanding on Business Purpose: Your Operating Agreement can reinforce the common understanding of why your LLC was established in the first place.

What to Include in Your Delaware LLC Operating Agreement?

Your Operating Agreement is a comprehensive document governing the internal workings of your LLC. It should be maintained with your business records and accessible to all members. When drafting it, consider referring to the Delaware Limited Liability Company Act for guidance on topics to cover, such as members' duties. Here's what to include:

1. LLC Name: Ensure the company's name matches the one on your Delaware Certificate of Organization, with no abbreviations or alternate spellings.
2. Ownership: List all LLC owners, their ownership percentages (usually based on their investments), and how ownership is determined.
3. Management Structure: Decide between member-managed and manager-managed structures, clarifying the roles and responsibilities of each.
4. Powers and Duties: Define expectations, powers, and duties of members and managers.
5. Voting Rights: Specify voting requirements, who votes, and the weight of each member's vote.
6. Distributions: Outline profit distribution, responsibilities, methods, and frequency.
7. Meeting Guidelines: Determine when, where, and how meetings are held.
8. Buyout and Buy-Sell Rules: Address what happens when members join or leave the LLC, including investment requirements and priority.
9. Succession Planning: Specify the transfer of ownership in cases of member departure, retirement, or death.
10. Dissolution: Detail the process and voting requirements for dissolving the LLC, including the distribution of remaining assets.
11. Modifications: Define how the Operating Agreement can be amended and the voting requirements for changes.
12. Single-Member LLC Statute: For single-member LLCs, assert exclusive ownership and decision-making authority.
13. Severability Provision: Include a clause stating that the invalidity of one part of the agreement doesn't affect the entire document.

Partner with Stellar for Professional Assistance

Forming your LLC was the first step in protecting your assets and pursuing your passion. Creating an Operating Agreement is the next critical step to secure your LLC fully. It enables your LLC to open a business bank account, collaborate with investors, and ensure your business runs smoothly. Drafting a Delaware LLC Operating Agreement is a pivotal move in establishing a thriving LLC.

Updating and Revising Your Delaware LLC Operating Agreement

There are various reasons to update your LLC's Operating Agreement. Fortunately, you can make changes at any time, provided you follow the appropriate procedures. Members' approval is required for amendments, and revisions should be documented.

You should consider updating or revising your Operating Agreement when:

• There are changes to the LLC's name or purpose.
• Additional investments are made.
• Membership changes occur.
• A new registered agent is appointed.
• Different managers are involved.
• Any provision contradicts the initial Operating Agreement.

Regularly reviewing your Operating Agreement, along with other key business details, is advisable. This can coincide with annual reporting and other administrative tasks, ensuring your LLC remains aligned with its goals and operations.

‍

Disclaimer: The content on this page is for informational purposes only and does not constitute legal, tax, or accounting advice. Seek the counsel of a licensed professional for specific questions related to these topics.