Delaware LLC Operating Agreements: Complete Guide

If you are thinking about forming a Delaware LLC, it’s important to have a well written and well understood LLC Operating Agreement because it governs the LLC ownership and management rights. Essentially, it says who gets to run the business and who gets to profit. An LLC Operating Agreement is like a prenuptial agreement on what to do when owners are not getting along. A well written Operating Agreement can anticipate problems and provide rules on how to address problems, avoiding costly lawsuits.

What is a Delaware LLC Operating Agreement?

A Delaware LLC Operating Agreement is a vital document that outlines how an LLC is organized and sets the foundation for the business. The LLC Operating Agreement establishes:

• Who the LLC members are;
• What rights the LLC members have; and
• How decisions are made in the LLC.

A Delaware LLC Operating Agreement does not need to be written or signed. It can also be oral or
implied. A written Agreement is advisable. Not all Agreements are created equal. For example, many
do not provide buy out rights for business partners who stop working for the LLC. This is included
with the IncNow Operating Agreement.

The LLC Operating Agreement should detail who owns the company, how it’s managed, and what
will happen when owners disagree. All members of a Delaware LLC should keep a signed copy of this Agreement with their other key business documents. In the event the owners change in the future the Operating Agreement can be amended and restated. IncNow offers this service of Amending and Restating the LLC Agreement. No other online company offers this change of LLC ownership document service.

An Operating Agreement is a private document, because it is not filed with the Delaware Secretary of State.

What Should a Delaware LLC Operating Agreement Include?

A well drafted Delaware LLC Operating Agreement should have sections about dispute resolution to anticipate the inevitable conflicts between business partners. For example, an LLC Operating Agreement should provide what percentage of ownership is needed for voting the managers or officers out of office and what percentage is required for the LLC to engage in “Big Deal” transactions like a sale of substantially all of the LLC’s assets or agreeing to borrow money.

Many simple agreements found elsewhere online are silent on this. The following provisions should not be left out of an LLC Operating Agreement to protect both LLC members and the business:

1. LLC Ownership – Clearly define who the LLC members are and specify each member’s ownership interest.
2. Voting Rights – Choose whether to split company interests into Voting and Non-Voting units. This way, you can differentiate between decision-making owners and passive investors.
3. Voting Procedures – Describe the process for making decisions within the Delaware LLC. Members should establish voting procedures, quorum requirements, and methods for resolving deadlocks.
4. Capital Contributions – Specify the initial investments that each member makes in the company and establish consequences for members who do not meet additional funding requirements.
5. Management Structure – Decide if your LLC will be managed by its owners (Member-Managed), non-owner executives (Manager-Managed), or a combination of both.
6. Transfer of Ownership – Clarify if and when LLC Members can transfer their ownership interests to others and specify any restrictions on ownership transfers.
7. Adding New Members – Describe the process for admitting new members into the Delaware LLC.
8. Member Withdrawal – Establish how a member can leave the LLC and what happens to their membership interest.
9. LLC Wind-Down – Determine what events will lead to closing the business and canceling the LLC. Outline how the members will handle winding up the company’s assets.
10. Dispute Resolution Provisions – The LLC Operating Agreement should have clauses aimed at resolving disputes between members, such as mediation or arbitration.

Does Delaware Law Require an LLC to Have an Operating Agreement?

Yes, the Delaware LLC Act requires all Delaware LLCs to have an Operating Agreement in some form. The law states that an LLC Operating Agreement can be “written, oral, or implied” between the
members. However, having a written LLC Operating Agreement is the only dependable way to make
the Agreement enforceable.

Without a written Operating Agreement in place, the Delaware court is forced to make legal decisions
based on testimony of owners whose handshake deals are often insufficiently vague. It is up to courts to fill gaps. In other cases, the court will piece together chains of emails or a course of conduct to ascertain that Agreement.

Not having a well drafted Operating Agreement is how to make your attorney wealthy in long court battles that could have been avoided entirely. Leaving your future in the hands of a court often ends in court ordered dissolution of the business. This is rarely in the best interest of the LLC or its members. Members of a Delaware LLC should carefully select a well written LLC Operating Agreement and keep a signed copy. Hopefully the Agreement can be put in a drawer and rarely seen again, but in the event things go sideways, that is the first document to be consulted on what to do.

Why is Having an LLC Operating Agreement Important?

Having a well prepared, written LLC Operating Agreement for is important for operating any type of business. The Operating Agreement can help settle disputes and prevent potential costly litigation between partners.

Delaware LLCs experience the following benefits from having a well-prepared LLC Operating Agreement:

• Prevent Business Disputes – The LLC Operating Agreement can include provisions that anticipate future problems and help avoid litigation. Most problems in an LLC come from disagreements between members. A well-prepared LLC Operating Agreement sets expectations of the members from the start of the business to help address problems later.
• Clear Ownership – The LLC Operating Agreement clarifies each member’s ownership interest and details the exact rights and responsibilities of each Member within the company.

In addition to avoiding disputes, a Delaware LLC needs a written Operating Agreement for several key business functions, including:

• Opening a Business Bank Account – Banks and other financial institutions will
  need a signed copy of the LLC Operating Agreement in order to open a business account for a Delaware LLC. This is because the bank requires proof that the person trying to open the account is properly authorized to act on behalf of the Delaware LLC. An LLC Operating Agreement is needed for the LLC to be “duly formed.”
• Proving Ownership in an LLC – In Delaware, the LLC members’ names are not
  listed on public records. Instead, a member should prove ownership by showing the LLC’s signed Operating Agreement, which outlines each member’s rights, responsibilities, and ownership share.

For large multimillion dollar financing transactions, banks may also require an opinion letter from Delaware counsel to show the LLC has the power and authority to enter into the transaction and perform on its contractual obligations.

Best Way to Get a Delaware LLC Operating Agreement

There are a few different options that Delaware LLC owners can choose when creating their LLC Operating Agreement. Members should select the Operating Agreement drafting strategy best for their specific situation.

Option 1.) Draft Your Own Operating Agreement

Creating your own Operating Agreement may seem to be the most affordable solution in the short-run to draft a Delaware Operating Agreement. This is almost never a good choice for a multi-member LLC even if you’re on a tight budget. Doing it yourself may result in a “Frankenstein” agreement with mistakes and inconsistencies. It may also be missing key sections. It will likely not give you the legal protection needed for your business. If you’re not familiar with how these agreements work, you could accidentally leave out important details or make mistakes that could harm your LLC in the future. Only a single-member LLC, should consider this option. Even with a single-member LLC, be aware that people you do business with from time to time will need to review your Agreement. They may judge you for a poorly written agreement. It is also possible that a poor Agreement could have clauses resulting in inadvertent piercing of the corporate shield, resulting in personal liability for business debts. Many simple mistakes could be avoided with a professionally drafted agreement.

Option 2.) Get an Attorney to Draft to Draft Your Operating Agreement

Hiring an attorney to draft your Delaware LLC Operating Agreement can ensure that you have a
comprehensive agreement that maximizes protection for your Delaware LLC and its members. However, hiring an attorney is not economical for every business. It can cost thousands of dollars. Generally, an attorney will use a form they are comfortable with as a starting point. Attorneys do not want to “rewrite” your Frankenstein agreement that you pieced together from online samples or wrote using generative artificial intelligence tools. Attorneys helping with drafting often can help avoid hidden traps.

It is a small price to pay for piece of mind and confidence in your future business. However, in simple ownership and control situations, it is possible to order an LLC Agreement from a service run by attorneys who drafted their template agreement.

Option 3.) IncNow’s Ready-to-Sign LLC Operating Agreement

A good alternate to a customized attorney-drafted Operating Agreement, in many situations, is to use
IncNow’s “Complete LLC” package or “Now LLC” package. Both of these packages include the Operating Agreement by Delaware’s first tax attorney, the IncNow founder, and his son also a Delaware lawyer who helps write LLC laws and litigates LLC disputes in the Court of Chancery. That professional experience makes the IncNow Operating Agreement better than forms prepared by document factories online.

Delaware LLC Operating Agreement Tips

Here are our top three Delaware LLC Operating Agreement tips to help you run your LLC properly:

1. Put It In Writing – A Delaware LLC should have a written copy of the Operating Agreement that is signed and agreed upon by all the LLC members. Although Delaware allows the Operating Agreement to be verbal, putting it in writing is the only way to make the agreement enforceable. If a Delaware LLC does not have a written Operating Agreement and there is a business dispute between the members, then it is up to a judge to interpret how the company is structured and who owns what.
2. Sign the Agreement– A Delaware LLC should have a written Operating Agreement that is signed and agreed upon by all the LLC members. Too often, in the rush to start a business, the owners forget to sign the Agreement. While an unsigned Agreement may be enforceable in Delaware as the best evidence of the Operating Agreement, unsigned agreements are problematic. Although Delaware allows the Operating Agreement to be verbal, putting it in writing and having it signed is the only way to make the agreement dependable. Should a Delaware LLC not have a written and signed Operating Agreement when there is a business dispute between the members, it would be up to a judge to interpret how the company is structured and who owns what. You don’t want to pay a lawyer hundreds of thousands of dollars to litigate a case that could have been prevented with a few signatures at the outset.
3. Adapt as the Business Grows – Update the LLC Operating Agreement whenever there are significant changes in the business. Examples include transfers of ownership or changes in management.
4. Cover Key Aspects – A Delaware LLC Operating Agreement should be comprehensive and include details about important aspects of the business. The Operating Agreement should address things like capital contributions, ownership percentages, management structure, fiduciary responsibilities, buy-out rights, transfer restrictions, tax matters, and much more.

IncNow includes your signature-ready LLC Operating Agreement in our “Complete LLC” and “Now LLC” packages.

MORE: Capital Distributions with the LLC Operating Agreement

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