What Every LLC Needs: Essential Elements of an Operating Agreement

Written by: Callie Kyhl

Forming a limited liability company (LLC) in Virginia offers several advantages, especially for small to medium-sized businesses, including limited personal liability, flexible tax options, simplified formation and maintenance, all while establishing business credibility.

However, if your LLC has multiple members, you will want an operating agreement to define ownership and management structure and describe procedures for key events during the life of the LLC. A solid LLC operating agreement sets appropriate expectations among members and reduces internal disputes.

When drafting a multimember LLC Operating Agreement in Virginia, it’s important to ensure the document is comprehensive, legally sound, and tailored to the members’ specific needs. Below are key considerations to keep in mind:

1. Basic Company Information

• Name of the LLC: Must match the name filed with the Virginia State Corporation Commission.
• Principal Office Address: Include physical address (no P.O. boxes).
• Registered Agent: Include name and Virginia address of the registered agent.

2. Members’ Roles and Responsibilities

• Initial Members: Clearly list all members and their ownership percentages.
• Capital Contributions: Specify the amount, form, and timing of each member’s contribution.
• Additional Contributions: Define whether additional contributions are required and how they’ll be handled.

3. Allocation of Profits and Losses

• Typically based on ownership percentage unless otherwise agreed.
• Specify timing and method of distributions (e.g., quarterly, annually).

4. Management Structure

• Member-managed vs. Manager-managed: Decide and specify which structure will govern the LLC.
• Manager Authority and Duties: If manager-managed, define powers, limitations, term length, removal procedures, etc.
• Voting Rights: Define voting thresholds for routine and major decisions (e.g., simple majority, unanimous consent).

5. Meetings and Voting Procedures

• Frequency and notice requirements for member meetings.
• Quorum and voting thresholds for various decisions.
• Whether written consents or virtual meetings are allowed.

6. Transfer of Membership Interests

• Restrictions on Transfers: Often includes rights of first refusal, approval requirements, or outright prohibitions.
• Buy-Sell Provisions: Events that trigger a buyout (e.g., death, disability, bankruptcy, resignation). Exit strategies are often overlooked when LLC members draft their operating agreements. Here are key considerations for building an exit strategy into the agreement.
• Valuation Method: Define how the membership interest will be valued (e.g., appraisal, formula).

7. Dissolution and Winding Up

• Events that trigger dissolution (e.g., unanimous vote, expiration, illegal activity).
• Process for winding up, including payment of debts and distribution of remaining assets.

8. Dispute Resolution

• Mediation or arbitration clauses to handle internal disputes.
• Jurisdiction should be specified (typically Virginia courts).

9. Tax Treatment and Accounting

• Elect how the LLC will be taxed (e.g., partnership, S corp, C corp).
• Fiscal year designation and accounting method.
• Designation of a “Tax Matters Partner” or “Partnership Representative.”

10. Indemnification and Liability

• Whether members/managers are indemnified for actions taken on behalf of the LLC.
• Limitations of liability to protect members from personal liability (within the bounds of law).

11. Compliance with Virginia Law

• Ensure alignment with Virginia LLC Act (Title 13.1, Chapter 12 of the Code of Virginia).
• Include any required provisions and avoid any unenforceable clauses.

12. Miscellaneous Provisions

• Amendment Procedures: Define how the agreement may be amended.
• Severability Clause: If one part is invalid, the rest remains in effect.
• Entire Agreement Clause: Confirms the operating agreement supersedes all prior agreements.

Additional Tips:

Custom Tailoring: Do not rely solely on templates—customize to your LLC’s actual business goals and relationships.

Legal Review: Have a Virginia business attorney review the document.

Member Signatures: Ensure all members sign and retain a copy.

Need Legal Advice?
If you have questions about how these laws affect you or your business, consulting a licensed attorney is the best next step. Legal interpretations and enforcement can vary by locality, and staying proactive can help you avoid costly legal trouble.

If you have any questions, please contact us at 703-369-4738 or info@vfnlaw.com.

This blog post is not intended to provide legal advice or substitute for the advice of legal counsel with respect to specific facts and situations. See disclaimer