Having an operating agreement template can be one of the essential documents you possess when creating the terms of how your company should be run. This document does not only detail the formal ways of how your company is managed on a long-term or strategic basis but also indicates the functional and financial decisions that your business has been built upon. This could include regulations, rules, and provisions made for each member.
Here’s a sample Operating Agreement template that can be easily customized and adapted to meet your requirements. It’s free to download and use.
What is an operating agreement?
An operating agreement is often used for Limited Liability Companies (LLCs) and acts as a legal document that may establish the rights and responsibilities of each member of an LLC. In this case, by having this document, the limited liability of the company is protected as it proves that it is a separate legal entity. This is typically an internal document used by single-member LLCs and multi-member LLCs - in which case, you'll need a multi-member operating agreement.
Additionally, this also acts as a legally binding document that specifies verbal agreements between the different members of the company. This includes how profits and losses will be handled (share of profits), what records will be kept, how much capital will be contributed by each member, etc. This should help in reducing any discrepancies or conflict regarding these matters as the operating agreement can always be referred to when such decisions need to be made.
Why should I use an operating agreement template?
States in the USA often have default rules that govern an LLC without an operating agreement. While you can stick to these rules, they are very general, and our advice is that you do not rely on them to manage your organization. However, we understand that writing operating agreements from scratch can also be a tedious process, which is also why we have provided this free operating agreement template.
By using an operating agreement template, you can easily include general details about your organization without having to specify every section of the agreement from scratch, e.g. business bank details, profit distributions and others. Once you have used this template to craft the important pieces of information, details that are inherent to your company can then be included.
Limited liability companies can include details about the percent of ownership, voting rights, initial and additional capital contributions to the business formation, financial records, and more.
What should be included in an operating agreement?
To ensure that your operating agreement matches the standards required to distinguish itself as a separate legal entity, your operating agreement template must include the following sections:
Details about the company
This is alternatively known as the Introductory Provisions section of the operating agreement and may include details about the name of the company, its members, and under what laws it was formed. Additionally, it may also distinguish itself from other companies by detailing its purpose or the services that it intends to offer in its day to day operations.
It should also include the basic company information, such as the physical location.
Interests and votes
This section is often used to detail the rights of the different members of the title company, making it a crucial part of any corporation operating agreement template. For some companies, all members may have equal voting rights on decisions, but this is not always the case. So, this must be stated as it will ensure that all members are aware of how much their votes are worth when key decisions need to be made.
Additionally, although different companies have varying ownership structures, they are mostly calculated based on certain rules. In some cases, shares may be distributed based on ownership e.g., 45% ownership means that you are entitled to 45% of the profits. However, in other companies, special allocations are made. For example, you may have 45% ownership but are entitled to 50% of the profits. In any case, this must be provided in your operating agreement template.
Capital contributions
When an operating agreement is being created, the capital contributions act as a way of indicating what each member has agreed to contribute to the company. While this is mostly a financial amount, it can also include certain services or materials.
The reason why this must be noted down in any simple operating agreement template is that most companies with multiple key members often don’t share these contributions equally. So, you may have a split of 60-20-20 or 60-30-10. By having this in your agreement, there is formal documentation that each member has agreed to provide a specific amount to the company. You may also want to include a clause that indicates what happens if a member cannot meet their capital contributions.
Books and records
Bookkeeping is required for all companies, which is why it has been included in our business operating agreement template. This part of the document should indicate what records are going to be kept by your company e.g., the names and addresses of each member, what each member has contributed, the financial state of the company, the balance sheet, etc.,
Limitation on liability
For LLC companies, the limitation on liability and indemnification for each member is incredibly necessary and must be included in your agreement. Generally, this should state that the company is willing to and must defend each member from claims that are brought against them while participating in company affairs. It also assures the different members that they will not be made liable for any unintentional wrongdoing. In essence, there is no personal liability in the legal business entity.
Details on the ownership structure
The operating agreement should cover the essential details the ownership structure, and this applies to both single-member LLCs and limited liability companies with multiple owners.
It should include the names and addresses of the owners, along with their ownership percentage and membership interests.
Additional details
The operating agreement template Word file that we have provided covers the standardized parts of an operating agreement. This means that the clauses included in this document can be used to launch all your company affairs. We have also made this document customizable, so feel free to include any additional clauses that may be specific to your company, such as:
- Right of first purchase
- Forbidden acts that may result in legal actions
- Force Majeure
- Insurance policies, etc.
Bear in mind that everything mentioned here is not legal advice, which is why we advise business owners to consult with a legal expert before putting together an operating agreement.
