Delaware LLC Operating Agreement: Drafting Checklist

Starting a Delaware LLC is relatively straightforward. You’ll first need to choose (and possibly reserve) your business name and elect a registered agent. You will include this information in your Certificate of Formation, a document that you’ll need to submit to the Delaware Division of Corporations.[1]

The conditions and requirements for LLC formation are defined in the Delaware Limited Liability Company Act[2] under the state’s applicable law. Yet, forming a prosperous LLC requires more than the documentation requested by the Secretary of State.[3] Documents like an operating agreement don’t fall under state mandate but are critical for your business.

Entrepreneurs embarking on a joint venture or creating a single-member LLC will benefit from drafting an LLC operating agreement. Unlike registering with the IRS, the purpose of such action might take time to be apparent. This article will explain why an operating agreement is crucial for your limited liability company.

Key Takeaways

• An operating agreement defines the organization and membership of the company in great detail.

• Company interest and liabilities are strictly separated from the member’s interest and liability through the limited liability company agreement.

• Your written agreement must cover all aspects of LLC organization and operations. To that end, it should be drafted professionally, preferably with the help of an experienced service.

What Is an LLC Operating Agreement?

An operating agreement defines how the management of the company functions, establishes the LLC’s capital accounts, ensures the stakeholders act in good faith, and even outlines how members handle their assets in case of business cancellation. Essentially, the agreement defines the terms of LLC operations and directs how such terms affect members of the LLC.

This guideline also describes voting rights, profit distribution, additional capital contributions, and fiduciary duties of each company member. As a detailed internal document, the agreement puts all vital business aspects in order, preparing your organization for optimal financial, tactical, and strategic decisions.

State Requirements

The state of Delaware doesn’t mandate LLCs to have an operating agreement. The state will require you to have a registered office of the company and submit your Articles of Organization.

While an operating agreement isn’t required, it’s worth noting that your LLC will be subject to state regulations without an agreement. In other words, the state defaults will apply if you don’t have a document defining your company’s unique operations.

LLC Operating Agreement Benefits

Your operating agreement defines the LLC as a business entity with separate liabilities. This aspect is critical since it can release LLC members from responsibility for company debt. While it’s the most important benefit, it’s not the only one.

The agreement helps your organization consolidate its resources. This means the management and operational staff will have precise procedures for handling vital operations, contributing to overall efficiency.

You’ll also be able to get the most out of your business bank account. If you present an operating agreement, banks will be more forthcoming regarding loans or grants. Of course, not every bank will ask you to produce the agreement, but the document could open some financial opportunities for your business.

Similarly, the agreement can provide a financial boost in taxation. You could secure more favorable tax conditions depending on how the document defines your organization.

You must ensure your operating agreement is written correctly to reap all the benefits mentioned. The document must account for your business purposes and cover all legal considerations. In other words, you’ll need professional help getting the agreement right.

The experience and expertise of Swyft Filings can significantly assist. Our operating agreement service will help you avoid unnecessary issues by drafting a foolproof document.

Who Needs an Operating Agreement?

Operating agreements are formative documents of LLCs. As mentioned, the state doesn’t mandate an LLC to draft this document, but doing so will be worthwhile.

While an operating agreement accounts for all stakeholders in a multi-member LLC, that doesn’t mean a single-member LLC won’t need the document. The agreement may be even more critical if you’re the sole member of your organization.

You can view a single-member LLC in the same light as a sole proprietorship. In that case, the company’s assets and liabilities will be closely tied to your own. This situation is worth avoiding should your LLC accrue debt or fall into dire financial straits.

With an operating agreement differentiating between business and personal assets, your finances and belongings will be sheltered from fallout resulting from company liabilities. The same principle will apply to LLCs with two or more members.

You’ll likewise need an operating agreement if you want complete control of your company’s operations. The document will serve as the primary guideline for business matters, letting you tailor the rules according to your specific needs. Without the agreement, your organization must follow the often rigid default rules the state sets.

Drafting Your Delaware LLC Operating Agreement

The process of drafting a Delaware LLC operating agreement is relatively straightforward. You won’t need to file the document with the office of the Secretary of State, which will be one less administrative burden on your back. Instead, your organization will keep a copy of the agreement on file.

The information needed in the agreement is primarily the basic company data. This means you could draft an operating agreement on your own, provided you know what the document should look like and what it should contain.

Luckily, there’s a simple way to do away with the guesswork and uncertainty. You can find LLC operating agreement templates online, making the drafting process almost effortless. Yet, that still leaves you with the question of what all goes into the document. Let’s look at the agreement’s structure in more detail.

Step 1: Provide Business Information

Providing essential business information will be the easiest part of the process. The required data will include:

• Name of the company

• Registered agent name

• Business address

• Employer Identification Number (EIN)

Step 2: List LLC Members

Listing the members of the LLC is, unsurprisingly, an essential step in LLC formation and operating agreement drafting. Here’s why this list is pivotal for the document and your business as a whole:

1. Creating an LLC member list serves as a safeguard when it comes to separating personal and business assets. With the list in place and member roles clearly defined, affairs of the company won’t have a financial impact on the member’s personal assets.

2. The member list will define the member’s interests and ownership percentages in a precise manner. Simply put, every member will have clarification of what they own within the company. Defining ownership will benefit both sole members and multiple members.

3. With the ownership defined, LLC members can also outline their company roles in detail. They’ll gain clarity on expected contributions, obligations, responsibilities, and interests.

Creating a comprehensive list brings transparency to critical aspects of your LLC, like membership interest. The list also helps potential new members onboard easily since you’ve taken the time to define their shares and responsibilities.

Step 3: Decide Member-managed vs Manager-managed

Regarding how you manage your LLC, you’ll have two essential choices. First, you can set up a structure where the members operate the organization themselves. Second, you may employ an assignee manager for the leadership role.

Both approaches have their merits. A member-managed LLC will have the advantage of the main stakeholders being directly involved in company affairs. This setup lets members have direct input in daily operations and may be particularly suitable for smaller organizations.

On the other hand, employing a manager will take additional responsibilities off the member’s shoulders. You can hire a professional to lead your teams, taking over regular company activities while members focus on the bigger picture.

Step 4: Lay Out Administrative Operations

Every operating agreement should clearly outline the administrative operations of the organization. These operations include daily, monthly, and yearly activities that allow your business to function like a well-oiled machine:

• Capital contributions

• Daily administration

• Voting rights of LLC members

• Allocation

• Distribution

• Business plan implementation

Once you define the admin operations within your operating agreement, you’ll have a clear-cut pathway when dealing with the state’s Division of Corporations, handling the business bank account, organizing tax returns, and more. This section of the document will also let you tailor your business approach.

You should define who is responsible for leading these operations. You may have an employee whose main job is to take care of administrative tasks. Alternatively, your organization can hire an expert to fulfill this role. In any case, the administration officer will need written consent, allowing them to represent your business in administrative duties.

Step 5: Add and Remove LLC Members

Finally, the operating agreement will need to account for potential membership changes. There’s no guarantee that the LLC membership will stay the same throughout your company’s lifetime. That’s precisely why your internal document needs to contain systematic solutions regarding new or additional members.

This section of the operating agreement will define indemnification, ownership percentages, membership interest, and other details. As a result, new members can jump into their roles immediately, making onboarding very straightforward and avoiding the expected growing pains.

Even if you’re running a single-member LLC, including this section in the agreement will be worthwhile. For instance, you may decide to expand membership down the line. In that case, getting new members in will be easier, allowing your company to grow unhindered.

Membership dealings may come with hefty legal implications. Therefore, seeking legal advice to flesh out all details about member changes would be best.

Create Your Operating Agreement Through a Filing Service

Although drafting your LLC operating agreement is relatively simple in theory, the process as a whole may be overwhelming. This is especially true if you want to create an agreement that will adequately cover all of the critical elements of your company’s operations.

However, you don’t have to be wary of making an operating agreement draft — Swyft Filings is here to help you. 

Is your organization new in the industry? Start your business off on the right foot. File for your LLC through us today and include our LLC operating agreement add-on in your cart to ensure you have all your necessary documents at the outset.

Existing businesses will have the support of Swyft Filings, too. If you’re looking for the next step after forming your LLC, our stand-alone LLC operating agreement service ensures you have a compliant document for conducting business in Delaware. We can help you wrap up your legal documents so you can get going as soon as possible.

Our services help you rack up fewer expenses and unnecessary complications. We’ll help you with all steps throughout your LLC formation so you can focus on building up your business. 

FAQs

Is an LLC Operating Agreement required in Delaware?

The laws in the state of Delaware don’t require LLC owners to draft or file an operating agreement. Still, the document will be critical for your business moving forward, even if the state does not mandate it.

How does an LLC Operating Agreement help protect my assets?

The operating agreement draws a clear boundary between business and personal liabilities. As a result, members will be less likely to suffer the consequences of company debt.

Who needs access to this document once it’s drafted?

The main stakeholders in your LLC will need access to the operating agreement. The document should always be available to people making strategic decisions within your organization.

How do I edit information on this document if membership changes?

LLC members have the power to make changes to the operating agreement. This usually happens by voting, which means the decision-makers in your company need to agree on the edits. Your business must add an amendment listing the new members or releasing old ones.

What other legal documents do I need to draft for my Delaware LLC?

The main document you’ll need to file with state authorities will be your Certificate of Formation. Besides that, you’ll need to obtain permits or licenses if necessary and get an Employer Identification Number.

Bibliography

1. Delaware Division of Corporations. “Certificate of Formation of a Limited Liability Company.” Accessed June 20, 2023.

2. The Delaware Code Online. “Title 6, Subtitle II, Chapter 18. Limited Liability Company Act.” Accessed June 20, 2023.

3. Delaware.gov OneStop. “Opening a Business in Delaware.” Accessed June 20, 2023.