All great businesses start as great ideas. That much is true, but when you’re first establishing your mission and brand, it’s easy to overlook all the steps that go into making that concept a reality. One key part is incorporating your business by opting to become a limited liability company (LLC) or some other type of entity. But there’s also a ton of paperwork that needs to be ironed out to truly prepare your LLC to serve your intended customer base. Chief among the documents you need to get started is your Operating Agreement.
Establishing an LLC involves many complicated steps up front. But creating a thorough Operating Agreement may be one of the most critical, as it streamlines your route to success and answers a lot of important questions regarding your business before you even need to address them. In short, we strongly recommend developing your Operating Agreement as soon as possible to chart the most secure path for your new business. To that end, let’s explore a bit about this essential tool and how you can proceed if you ever need to make changes to it.
Your LLC Operating Agreement
Part of why an Operating Agreement is so indispensable is that it protects you and your business from any number of circumstances. The business world can be fickle; the more defined your operation is, the better shape you’ll be in for the long term. At its most basic, an Operating Agreement is a contract involving all the members of your LLC, which focuses on the core elements that comprise how your business will be run and structured.
This includes the roles, rights and responsibilities of those aforementioned members (and the process for adding or removing members), but it also includes to the way your company will be managed. Perhaps most critically, your Operating Agreement details how any income your company brings in will be distributed, including the breakdown of ownership shares, profits and losses. The details that should be included in this document depend on what state your company is based in, as well as your own preferences.
While it involves a ton of back-end work and isn’t required by most states, an Operating Agreement is well worth the effort because of the protection it provides. An Operating Agreement can uphold the legal credibility and limited liability status afforded to your LLC, and it gives each of your company’s members a chance to weigh in on the rules and procedures that govern how the business will be run, even if this differs in key ways from the default rules of its home state. The freedom to customize your company’s guidelines limits the opportunity for misinterpretations or internal disputes.
As one might expect, the most hot-button element of any Operating Agreement involves how ownership shares are broken down among the members. Within the document, you can delineate beyond a shadow of a doubt who earns what based on the company’s income. That often includes profits and losses (also known as distributive shares), as well as who has control over management decisions. The agreement defines the roles each individual plays in your company, and which withdrawal or termination policies will go into effect if necessary.
Amending Your LLC Operating Agreement
In the business world, nothing is ever set in stone. So now that we’ve established what an Operating Agreement is and why you definitely need one, what happens when you find that you need to make some changes? Well, first of all, your Operating Agreement should include a section that details the processes you’d use to make any amendments to the initial draft. This prevents any debate over the required conditions and gives you all the details you’ll need about how to change your LLC Operating Agreement.
Amending your LLC Operating Agreement is a big decision that shouldn’t be taken lightly. That said, certain circumstances necessitate an adjustment in the core documentation of your company simply because they present a fundamental change to your organization or its structure.
Here are a few examples of when you need to update your agreement:
- Change in membership, whether adding or removing any member
- Changes to when members receive their shares
- Adding more capital to your business
- Making percentage changes to member distributions
- Adjustments to any items pertaining to management or finances
Once you encounter one of the above situations or otherwise need to make necessary changes to your Operating Agreement, you have a decision to make. One way to go is to hire an outside attorney, but that route takes longer and is often fraught with costly fees. You can also choose to customize the agreement on your own. While amendments to your Operating Agreement are not required to be filed with your LLC’s home state, the company’s members need to approve the change before any updates are made. How you proceed from here depends on whether your Operating Agreement, as originally filed, details the procedure for proposing and voting on amendments. If not, reach out to your Secretary of State’s office to find out what state laws dictate about amendment approval.
The third and easiest option is to simply rely on Incfile’s low-cost $199 flat fee option. We can tailor your Operating Agreement to fit your needs and ensure your members are satisfied with the results. After all, this is one of your company’s most impactful internal documents, and no one will ultimately be more directly affected by substantive organizational changes than your membership. The language you apply to any changes to your Operating Agreement is critical, since your goal is to be as clear as possible and prevent any confusion down the line. Remember to carefully consider your options before you take matters into your own hands or entrust an outside attorney to finalize the latest updates to your Operating Agreement.
The Bottom Line About Operating Agreements
Your LLC Operating Agreement is a smart way to move forward confidently with your business plans, especially if your company is just starting out or is relatively fresh to the market. So perhaps it’s time to step up your game and get your business off on the right foot.
Thankfully, Incfile can help by lending our expertise and support in getting you started. Learn more about how we can assist with forming your LLC or creating and amending the documents you’ll need.