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What is an Operating Agreement and an LLC? And how do you form one?

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Forming an LLC is easy if you know exactly what to do. And this includes knowing what an LLC is, understanding an operating agreement and when you need to have one.

Although a limited liability company has no predetermined structure, it still needs to undergo legal processes just like any business. If you are interested in Delaware LLC formation but do not know where to start, this guide can help you begin and finish the process. There are also a few considerations you might need to take note of, such as your LLC name, Delaware series LLC cost, and its taxes. Keep reading to gain more information about it. Formation of LLC series only takes a few couples of steps. These are:

1.  Certificate of Formation

The COF is essential for the legalization process, and you can have it done at the Division of Corporations. Fill out the form with the required information.

2.  Wording

Keep an eye on the fourth clause of the form. You need to include the wording, “Notice is hereby given pursuant to Section 18.215(b) of the LLC Act that the debts, liabilities, and obligations incurred, contracted for, or otherwise existing with respect to a particular series of the LLC, shall be enforceable against the assets of such series only and not against the assets of the LLC generally, or any other series thereof, and none of the debts, liabilities, obligations, and expenses incurred, contracted for, or otherwise existing with respect to the LLC generally, or any other series thereof, shall be enforceable against the assets of such series.”

3.  Payment for filing

After filling out the form with the information and adding the verbiage, you need to pay a filing fee that costs $90. Submit the form once you are done at Delaware’s Division of Corporations.

When filing a Certificate of Formation, you should note that the series on your LLCs do not require separate submissions or certifications. But each LLC needs to have its employer identification number, which you can apply to at the IRS. Likewise, for your LLCs’ Certification of Formation, you need to include its structure, name of managers and members, as well as the tax structure designated for each LLC. You can do it if you are not yet done submitting the form. However, if you already submitted it, you are required to update your COF for your LLCs’ information.

The cost of LLC formation

As mentioned above, it costs $90 to file a Certificate of Formation for your LLC. To give you a brief explanation for this fee, read the following:

  • You can pay the fee at the Division of Corporations.
  • The filing fee remains $90 regardless of how many LLCs you have in the series.
  • Each series needs to pay one corporation fee for tax annually.
  • The due for each annual payment is every June 1, which costs $300.

Are you wondering about tax?

The good thing about the tax system of LLCs is that you can choose how you want each series to be taxed. This is because the IRS sees each series as separate entities, which corresponds to separate tax entities as well. An Operating Agreement is a key document used by limited liability companies (LLCs) to outline the business’ financial and functional decisions including rules, regulations and provisions. The purpose of the document is to govern the internal operations of the business in a way that suits the specific needs of the business owners.

Operating Agreements for LLCs

Although an Operating Agreement is not a requirement of LLC formations in most US states, the benefits of having one fully justify creating one from an LLC Operating Agreement template

An Operating Agreement is a legal document that outlines the ownership structure, operating procedure and member duties of an LLC. An Operating Agreement defines the financial and working relations between LLC members (or owners) and between LLC members and managers. It helps businesses avoid future risk and conflict, which is why, regardless of state formation requirements, it’s good for an LLC to have one.

Most of the time, an Operating Agreement consists of six main sections: Organization, Management and Voting, Capital Contributions, Distributions, Membership Changes and Dissolution. The first section, Organization, deals with the details of formation of an LLC which include where the LLC was formed, who its members are, and the structure of ownership. With multi-member LLCs, this section will also stipulate the share of each member’s ownership.

The second section, Management and Voting deals with how the LLC is managed and how members vote; it specifies the authority members have over business affairs, how decisions are to be made by means of a voting system and the amount of votes required for a decisive outcome.

The third section, Capital Contributions outlines which members gave money to start the LLC and how further capital will be generated by members for the LLC.

The fourth section, Distributions, deals with how profits and losses, including money, physical property, and other business assets, are distributed among members.

Section five, Membership Changes, is concerned with the process of adding to, or removing a member from an LLC. This section also deals with how and when members can transfer their ownership share to another member or individual.

The sixth section, Dissolution, explains both the circumstance under which an LLC can be dissolved and the conditions under which an LLC must be dissolved. In line with academic research, operating agreements should also address the matter of self-dealing and procedure in the event that members fail to deliver on their promised capital contributions. 

Once an Agreement is completed, it doesn’t need to officially filed anywhere. It would be a good idea, however, to file the Agreement with all other official and business documentation. In event of drastic changes to the ownership and management structure of an LLC, it would also be a good idea to revise and update it, provided that all members have consented to alter the Operating Agreement. 

An Operating Agreement is a requirement of LLC formations in only a handful of states, California, Delaware, Maine, Missouri and New York. Yet due to the benefits associated with having Operating Agreements, it is recommended that every LLC has one. For multi-member LLCs, an Operating Agreement helps prevent misunderstandings among members because it sets out clear expectations of member roles and responsibilities. For single-member LLCs, an Operating Agreement affords a business more credibility and also ensures that courts uphold the limited liability status of an LLC. 

Using an Operating Agreement template 

Operating Agreements can very easily be created using a template, which is readily available online. The usual Operating Agreement template tool includes features for single-member as well as multi-member LLCs, and also allows you to customize specific sections and add clauses where you feel it’s necessary. Using an Operating Agreement template is one of the easiest ways to create a formal Agreement, especially in states where it is not a mandatory requirement of LLC formation. 

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