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When starting a limited liability company (LLC) in Alaska, there are a lot of details to attend to. You need to choose a good name, make sure you are compliant with all laws, and file your Articles of Organization to register your business officially with the state of Alaska.

However, before you get your limited liability company up and running, it’s important not to overlook creating an Operating Agreement. In this article, we will discuss what an Operating Agreement is, why you need one, how to create one, and much more.

What is an Alaska LLC Operating Agreement?

Limited liability companies (LLCs) come in all shapes, sizes, and purposes. They are also a great business structure in terms of flexibility. Because of this, it is a good idea to create a clear set of rules and procedures by which your LLC and associated members should adhere to avoid disagreements or extended debates over how to proceed on various issues.

Without an Operating Agreement, any problems or disagreements among LLC members will be subject to the default state laws, which often do not align well with the specifics of each business. Although Operating Agreements are not legally required in Alaska, they are strongly recommended for protecting your business and the rights of all of those involved and avoiding disagreements down the road.

Why do I need an LLC Operating Agreement in Alaska?

An Alaska LLC Operating Agreement not only provides your business and associated members additional legal protection, but it also allows you to set your own rules and really examine how you want to run your business. 

There are many details to consider, such as voting rights, ownership percentages, capital contributions, meetings, and membership changes. Your Operating Agreement is a chance to make these important decisions and establish them in a way that makes them legally enforceable

More specifically, the reasons to have an Operating Agreement include:

• Protection of your business’s limited liability status: Establishing your business as an LLC already grants a certain amount of protection, but spelling out which assets belong to the business and which belong to members in an Operating Agreement can create an additional layer of protection.
• Clarification of verbal agreements: Verbal agreements require perfect memories and perfect trust. It’s always a better idea to get things in writing. Your Operating Agreement is a great place to get all verbal agreements between members in a written, legally binding form.
• Protection of agreements in the eyes of Alaska: Without an Operating Agreement, the rules that govern your business will be the default state laws. By having an Operating Agreement, the rules that govern your business are created by you and not the state.
• The flexibility offered by an LLC business type: LLCs are very flexible business types, granting their owners a lot of leeway in how they are run. But this also leaves a lot of open decisions to be made. It’s best to sort out what works for your business early on and establish it in the Operating Agreement. You can always amend your agreement later if needed.
• Ability to open business bank accounts and lines of credit: Banks, lenders, and vendors sometimes want to see an Operating Agreement before working with you. Having one can help legitimize your business.  
• Getting in the right mindset for starting your business: Creating an Operating Agreement is an opportunity to give serious, focused thought on how you want to run your business. This is a great way of getting you in the right mindset for launching your LLC.

What do I include in my Alaska LLC Operating Agreement?

By creating an Operating Agreement, you and your fellow members decide how ownership will be divided, what the responsibilities are for each member, what your management structure will be, and more.

Try to think of every possible scenario you might encounter in the operation of your business and determine how it will be handled. By getting everything in writing, you will have a legally binding reference to guide your business moving forward.

To help make sure you don’t leave anything out, here are several of the main items to consider including in your Washington Operating Agreement:

1. LLC Name

Your Operating Agreement should include the name of your business. More specifically, it should include the exact name of the company, including the LLC designator, as you entered it when you filed your Certificate of Formation with the state of Alaska. 

Including the name of your LLC in the Operating Agreement isn’t just a practical matter of making it clear which business it applies to, but having the exact legal name is what makes the items within the agreement legally enforceable. 

2. Ownership

In your agreement, be sure to list the full names and legal addresses of all owners and their percentage interest. For example, you may split ownership equally among four members, each owning 25% (the total should always equal 100%).

You are free to split the ownership any way you would like. It doesn’t need to be an equal distribution or tied to capital contributions. The only requirement is that all members agree on it.

3. Management Structure

The two main LLC management structures are member-managed LLCs, which are managed by the owners, and manager-managed LLCs, in which the management duties are carried out by nonmembers. In the latter case, the members relinquish some of the decision-making powers.

Be sure to clearly define your chosen management structure in your Operating Agreement, including the names and roles of all managers and any interest they have in the business. In addition, consider detailing the authority associated with members and managers and their voting rights. 

4. Duties of Members and Managers

The duties of members and managers can vary considerably from business to business. In some cases, members have no other obligations other than to attend annual meetings. In others, they may serve in a management role and be completely responsible for all aspects of the business.

Your Operating Agreement should name the members and managers and indicate what is expected of each and their voting rights and oversight. 

5. Voting Rights and Responsibilities

It is important to include the details of how voting will work for your business. While some LLCs choose to have all members’ votes count equally, others may weigh votes based on percentage ownership or other factors.

Perhaps there are certain types of decisions that should only be voted on by managers and others that should be left to the purview of members only. Other considerations to include are what percentages are needed for items to pass a vote. You may wish some decisions to be passed by a simple majority while requiring that others (such as voting in a new member) be unanimous. 

6. Distributions

When your business turns a profit, you will need to decide how that profit is distributed. You may wish to designate a certain percentage to be reinvested with the remainder distributed among the members based on percent ownership, capital contribution, or some other metric of your choosing. 

You should also include details as to how the distribution will be handled. Who is responsible for cutting the checks or setting up the direct deposits? When will this happen — at the end of the fiscal year or on some other schedule?

In addition, you should have a plan for what to do about losses. Will you require members to contribute additional capital? How much? Make sure all of this is spelled out in your Operating Agreement.

You may also wish to specify that each member is responsible for paying taxes on any distributions, as LLCs are pass-through entities (they are not taxed at the business level, but members pay personal income tax on their distributions). 

7. Holding Meetings

LLCs are under no obligation to hold regular meetings, but it is often a good idea to do so. Annual meetings are common and are a great way to assess the year’s progress, vote on new issues, and make plans going forward.

If you want to hold regular meetings and would like attendance to be mandatory, you should include this in your Operating Agreement. Not only does this make expectations clear to everyone, but if certain members refuse to attend or stop participating, you will have legal grounds to hold them responsible and potentially vote them out if necessary. 

8. Buyout and Buy-Sell Rules

A clear plan for how to handle things if an existing member wants to leave the business or if you want to bring on an additional member is vital. 

All members have a certain percentage of ownership. If one walks away, they must be compensated for the share of ownership they are giving up. This is called a buyout. Usually, the remaining members contribute a portion of funds or a share of their distributions to pay the leaving member a total amount comparable to the value of their share. 

A plan for adding new members should be established as well. Will you require a unanimous vote, when bringing in someone new? Will a new member be required to contribute capital? 

9. Succession Planning

While it isn’t pleasant to think about, a member may pass away. You should be prepared for such an event by including succession plans in your Operating Agreement.

Something must be done with a deceased member’s share of ownership. You need to decide if you want any rules around who they can leave their interest in the business to when they pass and what rights the successor may have.

After this is decided, all members can update their wills accordingly.

10. Dissolution

Your Operating Agreement should contain a section describing how the decision to dissolve will be made and what the procedure to do so will be. Will you require a unanimous vote? A simple majority? If there is disagreement about dissolving, can the members who wish to stay buy out those who wish to leave?

You should include a clear strategy for how any assets or outstanding debts will be distributed among the members. Finally, someone should be designated responsible for making sure the Articles of Dissolution are filed with the state of Alaska, along with the $25 filing fee. 

11. Modifications to the Operating Agreement

Regardless of how carefully you prepare your Operating Agreement, you will likely need to modify it from time to time. Sometimes, the need arises due to original plans not fitting well with the day-to-day operations, and sometimes, the business evolves, and the old rules don’t account for all of the changes.

First, include a plan for how often potential changes may be visited. Perhaps you want to review the Operating Agreement at an annual meeting and vote on changes then. Maybe you want to review the agreement whenever any significant changes occur.

Second, you should decide how modifications are agreed upon and whether the vote needs to be unanimous. You also need to designate someone responsible for creating the revised document. In some cases, you may need to write up an amendment, but in other cases, it might be more expedient to draft a new agreement. 

12. Single-Member LLC Statute

If you are the only member of your LLC, you might be wondering whether an Operating Agreement is even important for you. As it turns out, Operating Agreements can protect single-member LLCs, as well. It will help keep your personal and business assets separate and make it easier for you to obtain business funding from different sources. 

Even though you won’t need to spend much time figuring out how to split the voting rights and distribute responsibilities, you should include a statement in your agreement that you are the sole owner with 100% voting rights and the authority to make all decisions on behalf of the business. 

13. Severability Provision

A severability provision is a boilerplate clause found in many legal contracts. It states that if any part of the agreement is found to be unenforceable for whatever reason, the rest of the agreement remains intact and does not become entirely void. 

This protects you if there is an error somewhere in your agreement and creates a legal basis for the remainder of your contract to still be valid. 

ZenBusiness has resources to help you make sure you get started with an Operating Agreement today. You may also wish to seek the advice of a legal professional to make sure everything is in order. 

Updating and Revising Your Alaska LLC Operating Agreement

You should review your Operating Agreement regularly. An annual meeting, for example, is a great time to determine if each of the provisions is still a good fit for how you want to run your business.

There may be other times to consider revising your agreement as well. Any time there is a change in ownership, a new registered agent, an alteration of the management structure, etc., the agreement should be adjusted to ensure continued legal coverage.

You can create amendments to your agreement by typing them up or simply revise the original document in its entirety. All members should sign the new document, and it should be kept in a safe place like before. 

Keep in mind that some changes made to your business may need to be updated with the State of Alaska. In this case, you may need to file Articles of Amendment and pay a $25 filing fee.