The Ins & Outs
What is an operating agreement?
An operating agreement is a contract between LLC members. It details financial rights and obligations, duties, the rights of managers etc. Most states require one, but Wyoming does not. So should you still have one?
The answer depends. Single member LLCs sometimes need one, but in such instances be careful about what it says. For multi-member or professionally managed LLCs the answer is yes.
We provide an operating agreement if we form your LLC. It is completed with your information and ready to print and sign.
Single Member LLC Operating Agreement
An operating agreement is sometimes considered superfluous as it’s an agreement with yourself. You may amend or disregard it at anytime. We supply one for two important reasons:
Transfer on Death Provision
The transfer provision ensures a smooth transition in case of your death. Almost everyone with an LLC would like their spouse, family or loved ones to inherit the company. Unfortunately, few LLC owners plan for death and the orderly transfer of their LLC ownership to their desired heir(s).
The transfer can be simple (via a trust or a Testament) or the transfer can go through probate.
If probated, banks will refuse to give immediate control of the account to the deceased’s heirs. The rightful heirs will require an attorney, thousands of dollars and significant time to become appointed the personal representative of the estate. Beyond added expenses, this could starve the company of needed cash.
Banks Frequently Request Them
The second reason is banks and other institutions often require you to have one. You will notice the single member agreement is sparse compared to the multi-member agreement. Why is this?
If an agreement details best practices for accounting, finances, risk management, etc., then it's easier to hold you accountable for failings. It is hard to claim you didn’t know better when you signed an agreement stating otherwise.
Multi-Member LLC Operating Agreement
There is no reason not to have one. We suggest members sign and upload the agreement to the portal for secure storage. The agreement accomplishes several things:
Sets Ownership Percentages & Contributions
Your articles of organization do not show members. Not formally declaring ownership stakes creates a future problem if there is not 100% agreement. How often is there 100% agreement about anything?
Wyoming LLCs have no required capital contributions. This means Members must agree in writing regarding their contributions or you will be left with little to no recourse should they not.
Defines What Mangers Can & Cannot Do
The operating agreement states what actions a manager must seek Member approval for. For example, managers can often be prevented from buying and selling assets, assuming loans or signing contracts.
Non-Disclosure Clause
If a Member does not sign an agreement limiting disclosure, then the Member is free to share any information they want with anyone they want.
Restrict Membership Interest Transfers
There are legitimate reasons to limit the ability of other Members to sell their shares. Imagine discovering your partner has sold his stake, without consulting anyone, to a previously unknown third party. This third party now has voting and economic rights to the company.
You may want to consider adding restrictions on transfers and a provision that gives the company a first right of refusal to acquire the interest a member desires to transfer on the same terms and conditions applicable to the proposed transfer. Other members should have a second right of refusal if the company does not exercise its first right of refusal.
Horror Stories
Story 1: Imagine two people purchase a home. One takes the loan and the second is not on the documents. The property either loses value, is sued or experiences rising payments. Cash flow turns negative and the second party quits contributing funds. However, the first party is still liable for the entire loan, not just their share.
Agreeing in writing to contributions mean the first party could sue for breach of contract and hold the second party liable. Not agreeing means the first party has no recourse.
Story 2: After five years you receive a buy out offer. However, there are multiple partners and transfers in and out were not documented. Members cannot agree what was salary, versus a loan, contribution or distribution. Who owns what now? How will you convince a judge?
Summary
Operating agreements are an integral part of Limited Liability Companies. They ensure agreement between members, and a smooth transition after your death. In our experience, if members do not sign an agreement in the first thirty days, then it is never signed. This can create major headaches, including the blurring of membership interests. You may contact us about a custom operating agreement.
What corporate services do we offer?
We offer services designed to make starting and running your company simple. Allow us to form your company, run your virtual office, forward your mail and act as your registered agent. You focus on what matters - running your company.
