One column for the operating agreement was wrong in every row, because the states are answering 3 different questions

Our state checklist carried a column headed Operating agreement with a yes or no in every row. It was wrong in every row, and it was wrong in a way no single column can be redrafted to avoid. There are three questions hiding inside that flag, and no two states answer them the same way.

The three questions are these. Must the company adopt an agreement at all, must that agreement be written down, and is there a date by which it has to exist. I had assumed the first question implied the other two, so I built a checklist that collapsed them and labelled it complete, and it told founders in Missouri and founders in Maine the same thing when the correct answers differ. An LLC needs an account once it exists, and Bank Index shows every US bank it lists alongside its regulator.

I went looking for the statutes themselves in 5 states to fix it, printed all 5 and read them side by side, which took most of a morning. What follows is what each of those 5 says about llc operating agreement requirements, what the default rules hand you when you write nothing, and the number I could not establish for the other 45.

New York carries the only clock I found

New York is the strict case and the only one of the 5 with a deadline attached. Section 417(a) of the Limited Liability Company Law says the members “shall adopt a written operating agreement”, and the word written is in the statute rather than in a summary of it.

Then comes the part about timing. Section 417(c) says an operating agreement “may be entered into before, at the time of or within ninety days after the filing of the articles of organization”.

Ninety days from the filing date, and no longer. That is the only figure in this whole area that behaves like the deadlines we normally publish, with a start date, an end date and a company on the wrong side of it if nobody acts. It is also the figure that persuaded me the old column had to go, because a yes in the New York row and a yes in the Delaware row meant 2 completely different obligations.

The same section adds a protection worth knowing before you sign anything. Under 417(b), an amendment that increases a member's obligation to contribute, alters the tax allocation, or changes how distributions are computed cannot be made without the written consent of each member adversely affected. So the agreement you sign in the first 90 days is harder to change against you later than most founders assume.

Maine treats the agreement as part of forming the company

Maine is the structural case. Section 1531 of title 31 lists what is required to form a limited liability company, and it lists 3 things rather than 1.

One authorised person executes and files a certificate of formation. The company has one or more members. And, in the middle, paragraph B: “A limited liability company agreement must be entered into or otherwise existing.”

That sits inside the formation section itself, next to the filing and the members, which is a placement I did not expect and which changes how I read the requirement. Maine is not saying keep good records. It is naming the agreement as one of 3 conditions for the entity to exist at all.

The softening arrives in the very next clause of the same paragraph. The same paragraph allows the agreement to be entered into before, after or at the time of filing, and nothing in it requires writing. So Maine demands an agreement more firmly than New York does and specifies its form less. That combination has no obvious place on a checklist. A column that says yes tells a founder in Portland to go and find a template, when what the statute wants from them is any agreement at all, in any form, existing at any point before or after the certificate reaches the Secretary of State. A checklist column cannot hold both facts.

Missouri changes its answer when you have one member

Missouri is the case that broke our column outright. Section 347.081.1 says the member or members “shall adopt an operating agreement”, which reads like New York until you go to the definitions.

Section 347.015(13) defines the term as “any valid agreement or agreements, written or oral, among all members, or written declaration by the sole member”.

Read the two halves separately, because they do not match. A Missouri company with several members may have an oral agreement and comply. A Missouri single member llc operating agreement has to be a written declaration, because there is nobody to have made an oral agreement with. The requirement gets stricter as the company gets simpler, which is the reverse of every assumption built into our old checklist.

This is the corrected version of that row. I have not seen the distinction stated in any of the summaries I checked before writing this, and I checked 6 of them. All 6 put Missouri in the same bucket as New York.

California and Delaware say you already have one

These two are the states people ask about most and they are the least demanding of the 5, in a particular way that catches people out.

California Corporations Code section 17701.02(s) defines an operating agreement as the agreement of all the members “whether or not referred to as an operating agreement and whether oral, in a record, implied, or in any combination thereof”, and it says including a sole member. The statute then closes the obvious escape route: such an agreement “shall not be unenforceable by reason of there being only one person who is a party”.

Delaware runs the same way with blunter drafting. Section 18-101(9) of title 6 defines the company agreement as any agreement “written, oral or implied”, binds a member to it “whether or not the member or manager or assignee executes” it, and states that the company “is not required to execute its limited liability company agreement” and is bound by it either way. Section 18-201(d) allows it to exist before, after or at the time of the certificate filing.

So the question do you need an operating agreement for an llc is put wrongly in both states. You already have such an agreement. It is oral or implied, assembled from what the members actually did and said, and it will be reconstructed by somebody else if the members ever disagree. The choice is not whether the agreement exists. It is whether you wrote it or somebody else gets to describe it.

What the default rules hand you

This is the part I would put in front of anybody deciding to skip the document, and it is the part with actual money in it. Delaware states its defaults plainly and they are not neutral.

Section 18-402: unless the agreement says otherwise, management is vested in the members “in proportion to the then current percentage or other interest of members in the profits of the limited liability company”, with the decision of members owning more than 50 percent of that interest controlling.

Section 18-503: unless the agreement says otherwise, profits and losses are allocated “on the basis of the agreed value (as stated in the records of the limited liability company) of the contributions made by each member”.

Put both defaults together with a common founding pattern. One founder puts in 10,000 dollars, the other puts in 1,000 dollars and 4 nights a week. Under the defaults the first founder holds about 91 percent of the profits and, through 18-402, control of every decision, because the statute allocates on contributions received and recorded, and hours worked are not a contribution the records will show.

What happens without an operating agreement is therefore not chaos. It is a specific, predictable and entirely lawful outcome that almost nobody would have chosen on purpose. I find that outcome more alarming than chaos would be, because chaos at least announces itself.

A digression about the word requirement

An aside, and it has nothing to do with your filing. The word requirement is carrying 4 different loads across these 5 statutes and I keep tripping over it.

In New York it means a duty with a deadline. In Maine it means a condition of the entity existing at all. In Missouri it means a duty whose form depends on how many people you are. In California and Delaware it means a definition that describes something you already have, whether you drafted it, discussed it over a table 3 years ago, or simply behaved in a way that a court will later read as an agreement between the members about how the company runs. Those are four different kinds of obligation wearing one word, and every state summary I read used that word without saying which kind it meant.

My suspicion is that the summaries are copied from each other rather than from the statutes, and I would not defend that as more than a suspicion. Anyway, back to the filing itself.

Where it gets filed, which is nowhere

Does an operating agreement need to be filed with the state? In none of the 5 statutes I read. No secretary of state accepts it, no fee attaches to it, and Delaware goes further and says the company need not even execute it.

This has a practical consequence people miss, and it costs nothing to avoid. Because nothing is filed, nothing is date stamped by a third party, and the New York ninety day window is therefore proved by your own records or not at all. I would sign, date and store the document the same week the articles are filed, and I would keep the filing receipt in the same folder, because those 2 documents together are the only evidence that the 90 days were met.

What I could not settle

I read 5 states. There are 50, and I am not going to write a sentence that begins with the remaining 45. States that require an operating agreement is a phrase I can only answer for New York, Maine, Missouri, California and Delaware, and 3 of those 5 answers turned out to be more complicated than a yes.

Nobody counts the companies without a written agreement either. The document is never filed, so it never appears in a register, so there is nothing to count. I looked for a survey in 2 databases and found none I would cite. Somebody has probably counted, in a law review or a bar association study among the 6 or 7 I have not reached, and until I have read it myself I would rather leave the space empty than fill it with a figure whose method I cannot describe to you in a sentence.

The detail I keep thinking about is Missouri. A company with 4 members can comply with a conversation, and a company with 1 member cannot. There is a defensible reason for that, since one person cannot agree with themselves out loud in a way anybody could later verify, and it still means the simplest company in the state carries the stricter obligation. I do not know how many single member Missouri companies have that written declaration, and I suspect the number is small, because until this morning I would not have told any of them to write one.