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Creating a comprehensive Arkansas operating agreement now will support your business success in the future. Find out what points this document covers and how to create one below.

What is an Arkansas LLC Operating Agreement?

If you are establishing an Arkansas limited liability company (LLC), you need an operating agreement. This legal document provides details regarding your business’s ownership and daily operations and guidance for events like the LLC’s dissolution.

Arkansas does not legally require LLC owners to submit an operating agreement to the Secretary of State when filing the Articles of Organization (the formal paperwork needed to form an LLC officially).

However, Arkansas law formally recognizes an operating agreement, defining it as “the written agreement which shall be entered into among all of the members as to the conduct of the business and affairs of a limited liability company.”

The state further recommends that a written (not verbal) operating agreement be entered among all LLC members. You can rest easy knowing that the state will respect your operating agreement — provided you address all the relevant points. Read on to find out what you need to include.

Why do I need an LLC Operating Agreement in Arkansas?

Creating an LLC operating agreement is considered best practice in the business world. The U.S. Small Business Administration (SBA) recommends that every LLC owner have this valuable documentation before commencing operations.

This paperwork defines who owns the business and how it will be run. Whether you’ve started an LLC with friends, or you are a single-member LLC and working solo, this paperwork is a must-have.

Here’s why your Arkansas LLC needs an operating agreement:

• Protect yourself in terms of liability: An operating agreement helps distinguish an LLC’s members (owners) from the business entity. If the business gets into legal trouble, such as a lawsuit, the operating agreement differentiates the members’ personal liability from that of the LLC. This means your personal assets as a member, like money and property, are protected if the business entity is sued.

• Formalize verbal agreements: If you’re starting an LLC with partners, you’ve probably discussed details of the business, like how much capital each person will invest. Since you trust your partners, it can be tempting to rely on spoken agreements — but this is a big mistake. The fact is that disputes arise in business. Having details like how much each partner owns in writing will prove useful in case of disagreements.

• Protect your agreement from state interference: Without an operating agreement, Arkansas “default rules” will apply to your LLC. An operating agreement protects you, keeping the state out of your business — literally. Take the division of profits, for example. When dissolving an LLC, state law might stipulate that profits be split equally among the LLC’s owners. With an operating agreement, you can specify that profits are divided up relative to how much of a stake each owner has in the business.

• Take full advantage of the flexibility an LLC offers: An LLC is arguably the most flexible type of formal business entity you can establish. The management, reporting, and tax requirements are less stringent than those required of a corporation, for example. The key to this flexibility lies in the operating agreement, which lets you specify everything from members’ voting rights to what happens if a member wants to leave the LLC and what steps are needed to dissolve the LLC.

• Legitimize your business: An operating agreement provides legitimacy, making it clear to third parties that your business is being conducted in a professional manner. Most banks will want to see an operating agreement before they will open a business bank account for you, for example. Additionally, if you are seeking funding from private investors, a serious angel investor will ask to see an operating agreement before putting their funds into your business.

What do I include in my Arkansas LLC Operating Agreement?

No two operating agreements will be identical. Every business is unique and will have unique needs that an operating agreement must address. That said, there are certain essential points that absolutely must be included in every Arkansas operating agreement. This section explains how to draft an Arkansas operating agreement.

1. LLC Name

Specify the business name as it appears in the Arkansas Articles of Organization. This is the paperwork filed with the Arkansas Secretary of State to form your LLC officially. It’s how the name appears in the state’s formal registry and how it would be legally recognized by the state.

Don’t use an abbreviation or nickname, and make sure to include the full business name, including the words “Limited Liability Company” or an acceptable variation thereof (“LLC,” “L.L.C.,” “L.C.,” or “LC”).

2. Ownership

In addition to providing the full names of the members (owners), provide a breakdown of the percentage of each member’s ownership. There are different ways to determine so-called “degrees of ownership.”

Many businesses choose to have ownership align with each member’s capital investment. For example, if you put $1,000 worth of your personal money into the business, and your partner puts in $500, you would be entitled to two-thirds ownership versus one-third for your partner.

If you are a single-member LLC, you will own 100% of the business.

3. Management Structure

An LLC can be member-managed or manager-managed. When you complete your Arkansas Articles of Organization, you must specify which management structure you will be using. In a member-managed LLC, daily business operations are overseen by the owners (called members). In a manager-managed LLC, the owners aren’t involved in daily operations; instead, they put a manager in place to run things.

Your operating agreement should specify the management structure and how it may be changed.

4. Duties of Members and Managers

Members and managers all have certain duties and obligations they must fulfill as part of their participation in the LLC. Your operating agreement should outline the precise duties and rights of managers — what can and can’t they do on behalf of the business?

Even members who aren’t involved in daily operations have tasks they need to comply with, such as attending regular member meetings and taking part in votes as required.

5. Voting Rights and Responsibilities

Members of an LLC are typically allowed to vote on major decisions impacting the business, such as a potential buy-out or bringing on a new member. The operating agreement should specify who is allowed to vote on what issues.

You can divide voting power unevenly between members. For example, if one member is a two-thirds owner of the business, and the other is a one-third owner, voting power might reflect this and award the two-thirds owner two votes and the one-third owner only one.

6. Distributions

Distributions refer to how profits and losses are divided among members. Profits can be distributed evenly or according to ownership percentages. It’s completely up to you — you just have to spell it out clearly in the operating agreement since profit distribution can be a common point of contention among partners.

Also, specify when and how profits are to be distributed — for example, at the end of the fiscal year to members’ bank accounts. You may also want to note that each member is responsible for paying taxes, as required, on any profits earned.

7. Holding Meetings

LLCs are not legally required to hold regular shareholder meetings or similar, like corporations. That said, it makes sense to have members and managers meet regularly to discuss business updates and potential amendments.

Put this obligation into the operating agreement from the get-go. It will spare you the stress of getting reluctant members to participate later. Plus, if members refuse to meet this obligation, it may be grounds to have them voted out of the LLC.

8. Buyout and Buy-Sell Rules

Over the course of your business, you may welcome new members, or existing members may leave to pursue other opportunities. Outline what is required to bring in a new member, such as how much capital investment they must make and who must vote on their acceptance.

Also, detail what has to be done when a member leaves, especially what happens to their ownership percentage. The operating agreement could stipulate that remaining members must be given the first chance to buy the departing member’s shares of the business, for example.

9. Succession Planning

Succession planning refers to what occurs when an LLC member dies or retires. The operating agreement should detail what happens to their stake in the business.

Are they allowed to leave it to personal family or friends? Does their share need to be transferred to an existing member?

Once these guidelines are made clear to members, they can update their personal estate planning documentation (like a will) in line with the operating agreement’s requirements.

10. Dissolution

If members decide they don’t want to simply leave the business but want to stop operating the business entirely, the LLC must be dissolved.

Define what is required for dissolution to occur — do all members need to vote unanimously on this measure?

Outline the formal steps for winding down the business in the operating agreement. This could include tasks like a final tax filing and submitting the formal Articles of Dissolution with the state.If members decide they don’t want to simply leave the business but want to stop operating the business entirely, the LLC must be dissolved. Define what is required for dissolution to occur — do all members need to vote unanimously on this measure? Outline the formal steps for winding down the business in the operating agreement. This could include tasks like a final tax filing and submitting the formal Articles of Dissolution with the state.

11. Modifications to the Operating Agreement

Operating agreements are made to be modified. For example, if a new member comes on board, you need to add their name to the operating agreement and any capital contribution, duties, and voting rights.

Include steps as to how the operating agreement may be amended. Who needs to vote on or sign off on this? This will be your guidebook for future amendments.

12. Single-Member LLC Statute

If you are a single-member LLC, it might seem like many of the above points don’t apply to you. For example, voting might seem like a nonissue since you — as the sole owner — will make all of the decisions for your LLC.

From a legal standpoint, this still needs to be spelled out in the operating agreement! Include a clause in your operating agreement clearly noting that you are the sole owner, with 100% ownership rights, and that you, as the sole owner, have the full authority to act on behalf of the LLC without conducting votes or holding meetings.

If you take certain actions without specifying this in an operating agreement, you could get into hot water with third parties — like creditors who extended a business loan to you.

13. Severability Provision

This is a boilerplate legal clause that you may have seen in other contracts. It basically states that if one part of the operating agreement becomes invalid, that does not invalidate the other points. This ensures that one small error in your operating agreement doesn’t render the entire document meaningless.

Updating and Revising Your Arkansas LLC Operating Agreement

LLCs are meant to be flexible and to accommodate the business owner’s needs. One of the great things about an operating agreement is that it is not set in stone. You can make revisions to this paperwork whenever you want or need it. In fact, you should revisit your operating agreement regularly to ensure that it’s still valid and applicable to your current business situation. An up-to-date operating agreement helps keep your Arkansas LLC legally compliant.

Always update your operating agreement whenever any major changes are made to the business. This could include changes in membership, capital contributions, the timing of profit distributions, percentage allocation of profits, or management structure (for example, you want to change from a member-managed to a manager-managed business model, or vice versa). Finally, an amendment is needed for any changes to managerial or financial points outlined in the initial operating agreement.

Even if no changes have been made to the business, review the operating agreement annually to verify that it’s still relevant. If you do need to make changes, it takes just three steps:

1. First, refer to the operating agreement to see how changes can be carried out; if you have multiple members, they likely need to vote on or approve changes.
2. Then, make the necessary changes in writing.
3. Finally, have all members sign off on these changes, as needed. 

Additionally, keep in mind that certain changes to your business need likewise to be reported to the Secretary of State. Any information covered in the Arkansas Articles of Organization — such as the LLC’s name, principal place of business, and managers — needs to be kept up to date.

This is done by filing a Certificate of Amendment with the Secretary of State. The filing fee is $22.50 for online versus $25 for a paper filing.

Partner With ZenBusiness for Professional Assistance

Drafting a comprehensive operating agreement requires great attention to detail. With the list of must-have points laid out in front of you, you may feel overwhelmed. Additionally, keep in mind that a business lawyer may advise adding other elements in line with your business type. You don’t want to let any essential points slip through the cracks.