How to Create a Real Estate LLC Operating Agreement

When you embark on the adventure of starting a real estate business, create a roadmap for your journey with an LLC operating agreement.

This legally binding agreement for your real estate LLC is in addition to creating your Articles of Organization and obtaining a registered agent.

You can enjoy various benefits specific to the real estate industry if you set this document up correctly.

Key Takeaways

• An LLC operating agreement is a legal document that guides the operation of your real estate LLC.

• A real estate LLC operating agreement protects your business in the eyes of your state.

• An operating agreement for your LLC overrides any verbal agreements between members.

How to Use an LLC Operating Agreement

An LLC operating agreement is a legal document outlining the functional and financial operations of an LLC.[1] Such an agreement protects you and any partners by creating enforceable responsibilities and rights for everyone involved in the company. Once owners sign the agreement, “it becomes a legally binding set of regulations you must follow,” according to Cornell Law School Legal Information Institute.[2]

Most limited liability company operating agreements cover management structure, business affairs, and company finances. The latter includes how you distribute profits and losses in your LLC and treat revenue for tax purposes.

Operating agreements also detail members’ and managers’ duties, powers, and responsibilities. The document will contain identifying information such as your company address and registered agent specifics. If you own a sole proprietorship, you generally don’t need an LLC operating agreement.

Do I Need One for My Real Estate Business?

According to the U.S. Small Business Administration, “It is unwise to operate without an operating agreement even though most states do not require a written document.”[2] The agreement may not be required by law. You may think you can operate your real estate company in good faith, but misunderstandings among members are common.

An operating agreement protects your real estate LLC and its members. If you don’t have such a document and a situation arises, your company will be subject to state law. Those rules may not sit well with your real estate investors and could negatively affect aspects of your business, such as rental property and real estate investment because they aren’t specified for your business.

An LLC operating agreement is also a valuable source of information for new members.

Benefits

A well-planned LLC operating agreement can bring order and authority to your real estate limited liability company. Made in good faith, this legal document is binding by state law.

Here are the top benefits of creating an LLC operating agreement for your real estate business.

• Enables you to retain control over the inner workings of your limited liability company. If you fail to create an operating agreement, your company will be bound by the rules of your governing state by default.

• Ensures strengthened personal liability protection. While an LLC does protect your personal assets and real property, an operating agreement spells out the separation between the LLC entity and its members. This ensures that personal assets like rental property are protected should your company experience financial difficulties.

• Details basic practices surrounding operational items such as tax returns, the company bank account, and the registered agent on record.

• Helps prevent disputes. By setting out rules and regulations regarding the operation of your real estate LLC, your company can avoid disagreements and misunderstandings should they arise.

• Reassures real estate investors. An LLC operating agreement shows those investing in your company that you are serious about running a successful, professional business.

What to Include in Your Real Estate LLC Operating Agreement

We have compiled a list to include all the necessary items in your operating agreement. The following LLC operating agreement template outlines the different pieces of information to include in this legal document. For any required items specific to your location, consult your secretary of state.

LLC Information

Your LLC operating agreement should start by providing basic information about your business formation. These details include your official company name and your business’s purpose (function). With a real estate LLC, it is best to be specific about the company’s purpose to protect all involved. For example, indicate if the company has been formed by members regarding a particular property.

Also include the place of business (address) and the date you filed your Articles of Organization and became official. Additionally, include contact information for you and your managing members and your registered agent’s name, address, and contact information.

Members 

The members’ section of your LLC operating agreement outlines essential details regarding the key players in your LLC. This includes the type of LLC you are forming. Indicate here if your company is a single-member LLC or, in the case of a joint venture, a multi-member LLC.

List the full name of each member of the LLC and their address. Include the personal assets each member contributed to the company and their membership interest, including ownership interest and ownership percentage. This latter decision is often made by considering the personal liability of each of the company’s real estate investors.

Also, list the names of each managing member and outline the voting rights of everyone involved. By law, you should update the document when new members come on board.

Installation and Removal of Members

This section of your LLC operating agreement requires clear guidelines as to protocols regarding adding new members and removing members from your company’s leadership team. This section is only necessary if you run a joint venture (multi-member LLC) rather than a single-member LLC.

In the case of adding a new member of the LLC, include the following:

• New member’s full name and contact information

• Membership interest

• Ownership interest

• Ownership percentage

• Voting rights

If a member decides to leave the business, there must be clear steps to follow so they can abide by the provisions of this agreement. Having this information clearly outlined in your operating agreement ensures seamless departure. Also, include how an heir handles the removal should the member die.

When a member acts in ways harmful to the company, it may be necessary to remove the member. Real estate LLC managers are generally not held liable if they act in good faith. However, misconduct with intent should have consequences. Include indemnification rules outlining how other company members will get compensated by the member removed for misconduct.

Management Structure

Clearly outline your company’s management structure and the roles and responsibilities of each manager. The first stipulation will be if the business is member-managed or manager-managed, as this will significantly affect the provisions of this agreement.

With a manager-managed structure, you must elect the managing member(s). Often this will be a member of the LLC other than yourself. It could also be an outsider you hire to oversee operations. Hereto, it is crucial to spell out the roles and responsibilities of the manager. This way, everyone involved understands what the person may do for the business.

If you run a member-managed company, that generally means you oversee the daily management. You must spell out your duties to benefit existing and new members.

Member-Managed vs. Manager-Managed

This portion of the operating agreement spells out who oversees the operations of your LLC.

As its name suggests, a member-managed real estate LLC features leadership by a managing member. Such an LLC may consist of single or multiple members. Members of such a company have the ability and authority to make legally binding decisions for the LLC. As such, all members are encouraged to play an active role in running the company.

A manager-managed real estate LL features a company run by an outside manager or managers that the members appoint to run the company. Such an individual may also be a member who has been externally contracted.

Member-Managed LLC Pros and Cons

There are several advantages of a member-managed real estate LLC. With such a business structure, membership interest is represented. This type of management structure is ideal for small businesses with few members. The system is also cost-effective, as no money needs to be paid to a manager.

Disadvantages of a member-managed real estate LLC include that the managing member must have management and real estate experience. This structure only works if members want to participate in daily business operations and decisions actively.

Manager-Managed LLC Pros and Cons

A manager-managed company’s advantages include hiring someone with real estate experience. An outside manager also provides a degree of objectivity as they make autonomous decisions. A manager-managed structure is ideal when a company is large and has complex needs and requirements. This structure is best when members don’t wish to participate in daily operations actively.

Disadvantages of a manager-managed structure include that members cannot interfere with the manager’s daily operations. Managers can, however, change the company’s system and replace the manager or convert to a member-managed company. Members can also implement indemnification rules to protect the company and its members from manager actions.

Financial Handlings

An essential piece of an operating agreement is outlining rules for handling the different financial streams within your organization.

Financial administration topics to include in your LLC operating agreement include:

• Bank account information

• Accounting method

• Fiscal Year

• Annual report details

• Approved lenders for real estate dealings

• How you make capital contributions

• When distributions are made

• Allocation of company assets

• Instructions for liquidation, if necessary

Distributions

Include a distribution model in your LLC operating agreement. This will outline how your company plans to distribute profits to the owners. Generally, with real estate LLCs, investors receive a preferred return on their investment of 5 to 10 percent. For such lenders, this is in addition to a share of any remaining profits. The LLC then receives the balance.

In this section, be specific in describing how you will allocate revenue and company assets. For example, include if you will make distributions at the end of the fiscal year or various stages throughout the year. Also, give the rules for capital contributions. If liquidation of company assets is necessary, outline the steps for completing this process.

Also, note in the distributions section that company owners can edit the document to change distributions later.

Tax Filing

In addition to avoiding personal liability, operating as a limited liability company offers tremendous tax benefits. The operating agreement should describe how your company will handle your tax filing with the internal revenue service when tax season rolls around and throughout the year.

As an LLC, regarding tax purposes, your company and its members benefit from pass-through taxation. This means that any profits or losses for the company get reported on each member’s personal income tax returns.

The operating agreement should also note when you will file tax returns and how and when you’ll distribute quarterly updates.

Affairs of the Business

The final section of your LLC operating agreement should cover the everyday affairs of your business and how you should handle them. Here, you indicate who is responsible for the various tasks to run your company and offer guidelines on how to face different situations should they arise.

Items to discuss in this section include who oversees the following and any applicable rules for handling these tasks.

• Day-to-day operations

• Real estate investment

• Real estate sales

• Rental property

• Company assets and their allocation

• Distributions and their allocation

Create Your Operating Agreement Online Today

As you can see, a great deal goes into crafting an operating agreement for a real estate LLC. If you prefer to skip the paperwork, Swyft Filings can help. Our powerful attorney-prepared LLC operating agreement template creates a custom document for your company. This gives you time to focus on running your business.

Swyft Filing’s LLC Operating Agreement services are the least expensive among our competitors. If you’re looking for the next step after forming an LLC for your real estate business, our LLC Operating Agreement service ensures you have a compliant document for conducting business. 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 complete all necessary documents at the beginning of your journey.

FAQs

How much does it cost to set up an LLC operating agreement for my real estate business?

Fees for setting up a customized LLC operating agreement for your real estate business can vary from $35 at Swyft Filings to several hundred dollars.

Is an operating agreement required for my real estate investment company?

While an operating agreement isn’t required for your real estate investment company, it is highly recommended. Without this legally binding document, your company is at the whims of your state’s laws and regulations.

What are the advantages of having an LLC operating agreement?

An LLC operating agreement spells out the internal financial and functional aspects of running your company in a way that best serves its members. This document safeguards your real estate LLC and its assets.

What is the difference between an operating agreement and business bylaws?

Bylaws are required governing documents for corporations (C corporations and S corporations), while operating agreements list internal operating procedures for LLCs.

Bibliography

1. Cornell Law School Legal Information Institute. “Operating Agreement.” Accessed June 2, 2023.

2. U. S. Small Business Administration. “Basic Information About Operating Agreements.” Accessed June 2, 2023.