Delaware LLC Operating Agreement

Why should a Delaware LLC have an operating agreement?

A Delaware LLC should have an operating agreement because a company cannot act for itself. In order to operate, LLCs require real humans (and other entities) to carry out company operations.

According to Delaware Code Title 6 § 18-101, your operating agreement (or “limited liability company agreement”) can be written, oral or implied. But, as a legal document, it’s best that it be written down. Oral agreements don’t hold up very well in court or in the heat of a disagreement between members. A strong operating agreement is essential for your LLC, and may be your most important internal document. Here’s why:

1. Your operating agreement proves you own your LLC.

You’re not required to include the names of your LLC members when filing your Certificate of Formation in Delaware, so you cannot easily use it as proof of ownership. Your operating agreement, however, includes the names of all members, so you can use it to show that you own your business.

2. An operating agreement can help reinforce your limited liability status.

To benefit from limited liability status, you must be able to demonstrate that your Delaware LLC is its own legal entity separate from its owners. Opening a bank account for your LLC shows this separation, as does creating and following an operating agreement.

3. An operating agreement can help head off misunderstandings.

Misunderstandings are nearly impossible to avoid within any company (or group of people, for that matter). But having a strong operating agreement to establish company rules upfront can help prevent those misunderstandings from turning into full-blown disputes.

4. An operating agreement can override Delaware’s default laws.

Without an operating agreement, your LLC will automatically be governed by Delaware’s Limited Liability Company Act. The problem is, the state’s default statutes might not work for your business. It’s a better idea to customize an operating agreement with rules and procedures that (within the bounds of the law) fit your Delaware LLC.

Delaware Case Law

We asked our lawyers for an example of how an operating agreement can make or break your LLC. Here’s what they said.*

“Consider the case of In re Carlisle Etcetera LLC, where the failure to actually adopt and maintain a comprehensive and clear operating agreement led to disputes among the members, with one group claiming to be members and demanding dissolution of the LLC. Unsurprisingly, without an operating agreement to resolve the matter internally, the dispute among the members resulted in extensive and expensive litigation. As part of the litigation, the courts had to determine whether a separate entity was a member of the LLC.

“Such valuable resources could have been preserved had the members of the LLC taken the time to plan ahead, discuss potential pain points, and distill their collective understanding into an operating agreement.”

What is included in a Delaware operating agreement?

Your Delaware operating agreement can include anything (within the law) not already covered by state statutes. However, creating a strong operating agreement is essential. A good operating agreement should include information about:

• Transfer of membership interest
• Voting rights and decision-making powers
• Initial contributions
• Profits, losses, and distributions
• Management
• Compensation
• Bookkeeping procedures
• Dissolution