Operating agreement

An operating agreement is the contract among the members of a limited liability company (LLC) that sets out who the members are, how ownership and profits are divided, and who manages the business. Delaware law calls it a "limited liability company agreement" and defines it as any agreement, "whether referred to as a limited liability company agreement, operating agreement or otherwise, written, oral or implied," of the members about the company's affairs (6 Del. C. § 18-101).

Why it matters in KYB review

For LLCs, the public formation document usually does not list owners. In Delaware the certificate of formation needs only the name, registered office and agent, and any other matters the members choose to include (6 Del. C. § 18-201). That leaves the operating agreement as the main document showing who holds what percentage and who has authority. It is where an analyst finds the membership interests needed to apply the 25% ownership threshold and the managing member who is often the control person.

Its weakness is that it is private and supplied by the applicant. Nobody outside the company has checked it. Under the CDD rule an institution may rely on the customer's beneficial ownership information only if it has "no knowledge of facts that would reasonably call into question the reliability of such information" (31 CFR 1010.230(b)(2)), so an operating agreement that conflicts with other evidence cannot be relied on as it stands.

What an analyst checks

• Right entity. Exact legal name and formation state match the registry.
• Members and percentages. Every member listed, percentages adding up to 100%, and corporate members traced onward to people.
• Management structure. Member-managed or manager-managed, and who the managers are.
• Signatures and dates. Signed by the members named, dated, and consistent with the formation date.
• Amendments. Later admissions, transfers or redemptions of membership interests. The original agreement may be years out of date.
• Consistency. Names and percentages match the beneficial ownership certification, IDs and any tax documents.
• Unusual rights. Special voting rights, vetoes or a separate class for one person can move control away from the largest holder.

Common pitfalls

• Accepting a template with blanks or placeholder names. It happens more often than it should.
• Reading only the first page. Membership schedules and amendments often sit in exhibits at the end.
• Percentages that do not add up. A schedule totaling 90% means someone is missing.
• Treating it as independent evidence. It is the applicant's own document. Corroborate where you can.

Related terms

Articles of incorporation / organization, ultimate beneficial owner, request for information (RFI), business verification documents.

How Sweat AI fits

In a Sweat AI KYB review, ownership taken from an operating agreement is marked as applicant-supplied and compared with every other source in the file, with conflicts listed for your team. See KYB review.