The Internal Revenue Code (IRC) does not directly govern the creation or operation of LLCs, as they are state-level entities, but it does have significant implications for how they are taxed. An LLC can be taxed as a partnership, corporation, or as a disregarded entity if it has only one member. The default federal tax classification for an LLC with more than one member is a partnership, which means that the LLC itself does not pay income taxes, but profits and losses are passed through to the members who report them on their personal tax returns. The operating agreement should address tax matters such as allocations of profits and losses, which must be consistent with IRS rules for partnership taxation. The agreement may also specify tax elections, such as electing to be taxed as an S corporation to potentially reduce self-employment taxes.
The Uniform Limited Liability Company Act is a uniform act that has been adopted in whole or in part by many states to provide a consistent legal framework for the formation, operation, and dissolution of LLCs. It outlines default rules for LLCs, which apply in the absence of specific provisions in an operating agreement. The ULLCA covers issues such as the establishment of an LLC, management and voting rights, distributions, transfer of membership interests, and dissolution. An LLC's operating agreement typically addresses these issues in more detail and can modify or waive certain default rules provided by the ULLCA. For example, while the ULLCA may specify equal voting rights for members, an operating agreement can establish different voting rights based on capital contributions or other criteria.