Being recognized globally as a corporate paradise, Delaware is an attractive jurisdiction to set up a business.
Starting a business in Delaware begins with choosing the appropriate legal structure. In comes the limited liability company (LLC).
A limited liability company is a legal structure that combines the limited liability of a corporation with the flexibility of a partnership. LLCs offer their members personal liability protection, they have very few reporting requirements, and they avoid double taxation.
When starting a Delaware LLC, there are a few essential requirements, one of which is drafting an LLC operating agreement.
What is an operating agreement for an Limited liability company ?
A Delaware LLC operating agreement is a legal document that summarizes significant operating procedures for a company.
LLC operating agreement are comparable to the By-Laws in that it specifies the terms that the Members will acknowledge the admission of new members, distribution of profits, assignment of interest, appointment of voting rights, and dissolution of the corporation.
LLC operating agreement can be written, or oral. But, as a legal document, it should be written down because it memorializes the understanding and agreements between the members.
LLC operating agreement is a private document that may be needed to open a business bank account and should be updated as the business requires modification.
Why should a Delaware LLC have an operating agreement?
Delaware LLCs do not mandate an operating agreement. But, it is recommended even if you are only a single-member LLC. A Delaware LLC should have an operating agreement because the operating agreement proves you own the LLC.
It can also help reinforce your limited liability status and head off misunderstandings.
Additionally, an LLC operating agreement can serve as a prenuptial agreement to avoid most partnership conflicts between members should any member decide to go in a different direction.
What does an Delaware operating agreement includes
A Delaware LLC operating agreement can include anything not already covered by state statutes. The operating agreement and can include but is not confined to the following:
- Management: a Delaware LLC operating agreement may specify how the LLC is managed. It will also establish whether the LLC will be operated by its owners or by non-owner executives or a hybrid that authorizes concurrent management by both.
- Economic rights & raising extra capital: the Delaware LLC operating agreement may establish how profits and losses are distributed among the members and how and when distributions will be made. Also, If LLC requires additional capital in the future, processes for raising such funds are will be spelled out in the Operating Agreement.
- Classes of Interests: a Delaware LLC operating agreement can Illustrate company Interests which can be split into Voting and Non-Voting units to separate owners into ones who make company judgments and those who are investors.
- Transfer of Interest and member withdrawal: a Delaware LLC operating agreement often describes whether a member can transfer interests to another person and what limitations are placed on such transfers.
- Cancellation: in the event of cancellation, an LLC operating agreement often illustrates the events that trigger the dissolution and cancellation of the LLC and how the company affairs will be handled.
The operating agreement will also include fiduciary duties, capital accounts and management, and mediation and arbitration of disputes.
Once the operating agreement is finalized, all members of the company must sign it. It can then be authenticated by a Delaware notary public.
Note: Since the agreement is a crucial aspect of a business, these agreements should be kept with your other business records in a safe place.
Do you need help with the operating agreements for your limited liability company, or help with establishing your Delaware company? – Let’s go ahead and contact your Damalion expert now and let us help.
