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A limited liability company (LLC) can be a great type of business to set up in Hawaii. Like a corporation, an LLC offers its members (owners) protection of their personal assets because it is legally considered a separate entity. Even better, starting an LLC requires less work than starting a corporation, and LLC members have a good deal of freedom in how they do business.

But before you start the LLC formation process, you’ll want to make a playbook that outlines all the processes your LLC will use to conduct its day-to-day business. This playbook is called an Operating Agreement. 

A well-thought-out Operating Agreement can solve internal arguments, solidify your LLC as a professional organization, and save you time and money. By drafting a quality Operating Agreement, you’ll make sure your Hawaii limited liability company runs as efficiently as possible. 

What is a Hawaii LLC Operating Agreement?

The main purpose of a Hawaii Operating Agreement is to arbitrate the way a Hawaii LLC will decide things. An Operating Agreement lays the framework for how a business entity will make decisions about its finances, administration, and the duties of its members.

The idea is to set up your Operating Agreement so that your LLC gives its owners the peak benefit possible. All members of an LLC work together to draft an Operating Agreement tailored to their specific business. When it’s done, all members should feel comfortable signing the legally binding contract because it supports them.

Although Hawaii law doesn’t require LLCs to have Operating Agreements, there’s a variety of reasons you should draft one when you file your Articles of Organization with the Hawaii Department of Commerce and Consumer Affairs. An Operating Agreement is essential if you want to conduct business your way.Make sure to have a written copy of your Operating Agreement. An LLC Operating Agreement is recognized by Hawaii law as legally binding, and it can be hard to prove the conditions of verbal agreements in court.

Why do I need an LLC Operating Agreement in Hawaii?

Having an Operating Agreement can help your company in a lot of ways. The U.S. Small Business Administration (SBA) recommends all LLCs have one.

While you can always put together a draft of your Operating Agreement by yourself, it’s wise to consult a good attorney to make sure your business gets the most out of the document. Here are just a few ways a good Operating Agreement can serve your company:

  • It can legitimize your LLC in the eyes of investors. It’s common for business investors to ask to see your Operating Agreement before they’ll contribute to your LLC. Often, banks even prefer to look at the document when deciding whether to issue you a line of business credit.
  • It provides a written document that can be referenced when company disputes arise. Your Operating Agreement will detail all the inner workings of your LLC and help solve procedural disagreement among colleagues.
  • Avoid going by default state laws. In the absence of an Operating Agreement, state law will make certain determinations about your business (for example, how profits are divided among members). These default laws might not align with your wishes.
  • It serves as additional proof of your limited liability status. The LLC structure is supposed to establish that the LLC is a business entity legally apart from the members. But if someone takes you to court to try to “pierce the corporate veil” by claiming that you are indistinguishable from your business in order to go after your personal assets, having an Operating Agreement in place helps further demonstrate to the courts that you and the LLC are indeed separate entities.
  • It allows you to do business your way. One of the best things about an LLC is that it isn’t subject to many of the strict regulations that a corporation is. With an Operating Agreement, you can design the best way for your company to do business. This luxury is not available to corporations.
  • It breeds cooperation among the members of your LLC. An Operating Agreement has to be agreed on and signed by all members of an LLC. Because members have a say in how their LLC will do business, they can feel more confident that their needs will be met. 

An Operating Agreement is a map that guides your LLC toward its goals. It keeps your business running smoothly and can quickly redirect it if it falls off course.

What do I include in my Hawaii LLC Operating Agreement?

Operating Agreements will vary greatly from business to business. A business attorney can help you understand what should go into an Operating Agreement for your specific business. However, there are a few components that are universal to most Operating Agreements.

Some items you may want to include in your Hawaii Operating Agreement are:

1. LLC Name

Copy your company name as it appears on your Hawaii Articles of Organization. The name must match completely because the name on your Articles of Organization is how Hawaii recognizes your business.

As a requirement, your business name must also contain the words “Limited Liability Company” or the abbreviation “LLC” or “L.L.C.” This designator is a legal part of the title of your business, and you must include it in your Operating Agreement. You may think that the term is implied, but you must include your company’s full name.

Don’t use any abbreviations, nicknames, or any other monikers your business may be known by. For your Operating Agreement to be legally binding, your business name must be the same as it appears in your Articles of Organization.

2. Ownership

List the entire name of each of your LLC’s owners (members). It’s up to the members of your LLC to decide how the ownership of the business will be split. You can divide the ownership of the company in any way your members concede to. 

One practical way some LLCs break up their ownership is based on the capital contributions each member invests in the company. If a business had a total of $100,000 in capital, and one member invested $40,000, that member would have 40% ownership.

Some LLCs split membership interest evenly among all members. If there are 10 members, each would own 10% of the company.

3. Management Structure

When you file your Hawaii Articles of Organization, you’ll have to choose which management structure is best for your business. There are two types of management structures you can pick from.

  • Member-managed LLC: A member-managed LLC is run directly by the owners (members). This type of LLC allows its members to be in control of the operations of the company. Another good thing about this structure is that it saves members time at the start of the company because they don’t have to hire anyone. 
  • Manager-managed LLC: A manager-managed LLC relies on a manager to supervise the operations of the company.  The manager(s) can be one or more of the members, someone hired from outside the LLC, or a combination of the two. 

4. Duties of Those Involved

Your Operating Agreement should explain the duties of all the members and managers who will be involved in your LLC. Be sure to designate the rights that each member and manager will possess. What is each individual allowed to do or not allowed to do on behalf of your business?

Even if you have a manager-managed LLC, and your members maintain a passive role in the operations, you’ll still want to outline member duties. There might be votes they’re required to participate in or meetings that they’ll have to attend.

5. Voting Power and Policies

In an LLC, you have the freedom to choose how much voting power each of your members has. A popular way to do this is to grant each member an equal percentage of voting power as the percentage of the company they own. A member who owns 20% of the company would have 20% voting power when it comes to making decisions.

If you decide that not every member needs to agree to every affair, indicate which members will be involved in making which decisions and which decisions require voting. 

Some of the issues your LLC can vote on include:

  • A proposed amendment to company policy
  • Company infrastructure
  • Approving new members
  • Approving management
  • How to distribute profits

6. Distributions

Your Operating Agreement should include directions for distributing your LLC’s profits among its members. In an LLC, you have a great deal of flexibility about how you can do this.

Not only will you have to decide how much of the profit each member will receive, but you’ll also have to decide how and when the members will get paid.

You can split the profits evenly among all members, or you can give a higher portion to members who own more of the company. However you choose to divide profits, you should make sure that all members are on board before putting a plan into action. 

Give each member a chance to voice their concerns about distributions so that everyone feels heard. Then, conduct a vote so that everyone agrees.

You’ll need to decide whether members will see their profits directly deposited into their bank accounts, receive a check, or be compensated in some other form.

Indicate whether members will see profits monthly, quarterly, annually, or at another agreed-upon interval.

7. Conducting Meetings

In Hawaii, an LLC isn’t legally required to schedule meetings. It’s up to the members of your business to determine an appropriate program for when to meet. Some distinctions you may want to include are:

  • Dates, times, and locations for meetings
  • The specific purpose for each scheduled meeting
  • What to do if a meeting needs to be added
  • Who must attend which meetings
  • What happens if a member is absent from a meeting
  • How long each meeting should run

Because each member of your LLC will sign off on your Operating Agreement, they’ll feel a greater obligation to attend meetings.

8. Succession Protocol

It’s unavoidable. If your LLC runs for a long time, you’ll eventually lose members to other business opportunities, retirement, or death. Your Operating Agreement should lay out the strategy for replacing these members.

When a member leaves, you’ll want to ensure there’s no confusion on what to do next. To ensure your company still runs smoothly, answer these questions in your Operating Agreement:

  • If a member dies, can they leave their stake in the company to a relative?
  • In a member-managed LLC, how will an absent member’s duties continue to be fulfilled?
  • What is an acceptable number of members for your LLC?
  • When does a member need to be replaced?
  • What is the process for onboarding a member’s replacement?

The answers to these questions are completely up to your members. They can have an impact on the way that members decide to manage their personal estates.

9. Buyout and Buy-Sell Rules

Whether you’re adding a member to your LLC, replacing an old member, or choosing to operate with a smaller crew after a member leaves, you’ll need to decide on provisions for buying into or selling out of your company. Include the following information in your plan:

  • What are the minimum and maximum investments a new member of the company can make?
  • Do current members get a chance to buy out a former member’s portion of the company before anyone else?
  • Are there any restrictions that new members must meet?
  • How is a past member’s voting power redistributed?

10. Dissolution

Planning for the end of your company at its inception isn’t fun, but you should have a strategy in place if your company is dissolved.

Without a plan, dissolving an LLC can be a chaotic experience. To avoid confusion, you should decide the following:

  • When should your company be dissolved? 
  • Who decides or votes on the issue?
  • What actions should be taken before the company can be dissolved?
  • What happens to the business’s assets?

There are a few steps you’ll need to take to dissolve your company legally. Make someone in your company responsible for taking the following steps:

  1. File your Articles of Termination with the Hawaii Department of Commerce and Consumer Affairs.
  2. File your final tax statements.

11. Changes to the Operating Agreement

When your company changes, so should your Operating Agreement. You may have to add new members or managers to it, compensate for a fluctuating budget, or adjust member roles to fit the company’s needs.

Your Operating Agreement should contain an agenda for changing it. Decide how amendments should be proposed, who needs to approve amendments, and what needs to happen for them to be implemented.

12. Single-Member LLCs

As the owner of a single-member LLC, you will be in charge of every business decision. Because no other members need to agree to your decisions, an Operating Agreement might seem needless. However, it can still be crucial to the success of a single-member LLC.

As your business grows, you may need to add new members. When you do, you’ll want them to know what their responsibilities are and what they can expect from you. An Operating Agreement serves as a legal contract that anyone joining your company must agree to.

An Operating Agreement also lets banks and investors know that you have the sole right to act on behalf of your company. They’ll need to consider this when issuing your business a line of credit.

Because Operating Agreement provisions can often supersede default Hawaii law when it comes to an LLC, drafting one can protect you from defaulting to state laws that could constrict the way you want to do business. 

13. Severability Clause

A severability clause is a basic part of a contract. It indicates that if any part of your Operating Agreement becomes invalid, the rest is not invalidated. The clause protects you from making a mistake that causes the rest of your document to become useless.

Updating and Revising Your Hawaii LLC Operating Agreement

Ensuring your Operating Agreement is up to date takes maintenance. You should schedule regular meetings to make sure it still serves the needs of your members. You can make a note to review it around the same time you’re preparing your annual report or noting any changes to your registered agent and/or registered office. The flexible nature of an LLC allows the business to evolve, and you should fix your Operating Agreement to reflect any procedural changes in your business.

Update your Operating Agreement any time your company:

  • Changes its business model 
  • Alters the way it handles finances
  • Shifts responsibilities
  • Adds members
  • Loses members

Invite LLC members to look over your Operating Agreement often. If you see anything that can be improved on, hold a vote on whether those changes should be implemented.

Updating the terms of your LLC also helps keep your Hawaii LLC legally compliant.

Alterations that affect your Articles of Organization will need to be filed with the Hawaii Department of Commerce and Consumer Affairs by filling out the Articles of Amendment.

Partner With ZenBusiness for Professional Assistance

Trying to put together your own Operating Agreement can be a daunting task. The advice of a quality business lawyer can be vital to keep you from getting overwhelmed. An attorney can guide you in creating the perfect Operating Agreement for your business.

Overwhelmed? ZenBusiness can simplify the process. Our customizable Operating Agreement template covers the basics and can guide the creation of your Hawaii Operating Agreement. However, since each business has unique needs, it’s still important to consult a legal professional on the finished product.

Hawaii Operating Agreement FAQs

  • While there is no legal requirement for an Operating Agreement in Hawaii, it is highly recommended that you draft one before starting an LLC.

  • You can find a template on ZenBusiness that will help you draft your Operating Agreement. Still, you should seek the advice of a good business attorney to ensure your Operating Agreement meets all the needs of your business.

  • It’s advisable. Even though the owner of a single-member LLC makes all of the business decisions, an Operating Agreement still protects the LLC from defaulting to generic state laws on LLCs and helps it to attain funding much like a multi-member LLC.

  • No, Hawaii does not require you to file your Operating Agreement. However, you should keep the original copy with official company records.

  • Legally, you can write your own Operating Agreement. A customizable template by ZenBusiness can make the process easier, but you should still seek professional help.

  • Even if you choose to draft your own Operating Agreement, it’s still wise to show it to a lawyer to ensure you get everything right.

Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.

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Written by Team ZenBusiness

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