LLC Operating Agreements
Linnemeyer Law represents businesses and business owners in the preparation, review, and negotiation of LLC operating agreements. Jonathan Linnemeyer has drafted and reviewed hundreds of operating agreements for companies across a wide range of industries and ownership structures.
Linnemeyer Law assists clients with operating agreements for newly formed single-member LLCs, as well as complex agreements for multi-member LLCs with multiple classes of membership interests.
About Operating Agreements
An operating agreement is a confidential, written agreement among the members of a limited liability company that governs the company’s internal affairs, ownership structure, and management. A carefully drafted operating agreement helps prevent disputes among members and provides clarity regarding how the company will be governed and operated.
Common provisions addressed in an LLC operating agreement include:
- Ownership interests of each member
- Vesting of ownership interests
- Voting rights and approval requirements
- Management authority, rights, and duties
- Member rights and obligations
- Allocation of profits and losses and payment of distributions
- Transfer restrictions and buy-sell or other ownership exit provisions
Like a partnership agreement or a shareholder agreement for a corporation, an LLC operating agreement should be adopted as early as possible following formation. Although an operating agreement is not required under Illinois law, an LLC without an operating agreement is governed by the default provisions of the Illinois Limited Liability Company Act. Those default rules may not reflect the members’ intentions or the practical realities of the business.
For most LLCs, the operating agreement is the most important contract among the members. It should be tailored to the specific ownership, management, and operational needs of the business.
Frequently Asked Questions
These are our top three most commonly asked questions.
Does a single-member LLC need an operating agreement?
While a single-member LLC has only one owner, an operating agreement is still an important governance document. In a single-member context, the operating agreement serves as a written declaration of the legal structure chosen for the company and helps document the separation between the owner and the LLC. This documentation can be important in disputes or litigation where the distinction between the individual and the entity is at issue.
How much does an operating agreement cost?
Operating agreements are customized based on the client’s business, ownership structure, and complexity. As a result, fees vary depending on scope and drafting requirements. Most operating agreements are prepared on a flat-fee basis, with a quote provided after we review the relevant information.
Current starting fees are as follows:
- Customized single-member LLC operating agreements: starting at $400
- Multi-member LLC operating agreements: starting at $1,200
- Operating agreement reviews: billed on an hourly basis, with a fee estimate provided after an initial review
What is a “member” of an LLC?
A member is an owner of a limited liability company. An LLC with one owner is a single-member LLC, while an LLC with more than one owner is a multi-member LLC. Depending on the terms of the operating agreement and the company’s Articles of Organization, members may or may not have voting rights or management authority.
What is a “manager” of an LLC?
A manager is an individual or entity authorized to manage the business and affairs of a manager-managed LLC. Not all LLCs have managers. In a member-managed LLC, management authority rests with the members, and no managers are appointed.
Managers do not need to be members, although they often are. Managers are typically appointed or elected by the members, and their authority to act on behalf of the LLC is governed by the operating agreement. In the absence of an operating agreement, each manager generally has authority to bind the LLC in transactions.
How is an LLC taxed?
An LLC may be taxed in several different ways for federal and state tax purposes:
Single-member LLCs are taxed by default as disregarded entities, meaning the LLC does not file a separate tax return and its income and losses are reported on the owner’s individual tax return.
Multi-member LLCs are taxed by default as partnerships and must file an IRS Form 1065. Each member receives a Schedule K-1 reflecting their share of income, deductions, and credits, which are then reported on the member’s individual return.
An LLC may also elect to be taxed as an S corporation or a C corporation by filing the appropriate election with the IRS (Form 2553 or Form 8832, as applicable). Making a tax election does not change the LLC’s legal status; it continues to operate as an LLC for all non-tax purposes. LLCs taxed as S corporations file Form 1120-S, while those taxed as C corporations file Form 1120.