Whether you plan on being a single-member LLC or have multiple members (owners), an Operating Agreement will not only help you manage the day-to-day operations but also the big picture of how you will run your business. An Operating Agreement provides instructions on how decisions will be made, adds credibility to your business, and prevents conflict between members.
With this guide, we will walk you through what an Operating Agreement is. We will also discuss what you want to include in this document and how to make changes later. Learn how to create a comprehensive Operating Agreement that will help your business be successful from the start.
What is an Illinois LLC Operating Agreement?
One of the steps in creating your Illinois LLC is drafting an Operating Agreement. An Operating Agreement is a legal document you and your business partners will write together and, once everyone has signed, will become a legally binding contract.
Illinois does not require an Operating Agreement to be submitted to the Secretary of State when filing your Articles of Organization paperwork, but the law does allow for an Operating Agreement to be adopted by the members of the LLC.
While Illinois does not require your business to have an Operating Agreement, you won’t want to skip this step. An Operating Agreement will help you with day-to-day decision-making and looking at the big picture.
The Operating Agreement will put in writing the affairs of the company, including roles, rights, and responsibilities of all members and managers involved in your business. It will set out the rules and governing structure for how your business will be run. It will also put in writing how decisions will be made regarding things like the membership and dissolution of the LLC. Overall, it’s a key document you want to outline management of the company.
Why do I need an LLC Operating Agreement in Illinois?
While it may not be required, drafting an Operating Agreement for your business is a good idea. Operating Agreements make running your business easier and provide you with additional legal protection for your company and you.
Other reasons to draft an Operating Agreement include:
- Legitimacy: An Operating Agreement shows other people and organizations that you know what you are doing and that you plan on being around for a long time. Having it provides you with more legitimacy when dealing with other parties. For example, in many cases, your bank will require you to provide a copy of your Operating Agreement before allowing you to open an account. An Operating Agreement is also a must-have if you are looking for outside investors to help your business get up and running or expand.
- Limited liability status: Having an Operating Agreement will help your LLC protect its limited liability status. Without an Operating Agreement, your business may look more like a partnership or sole proprietorship, which opens you up to be personally liable for any trouble that may come up.
- Formalize agreements: It also protects you against disagreements with your partners. Imagine if you sat down with your partners and agreed to specific terms, but no one wrote them down. Oral agreements lend themselves to being remembered differently by different people. That can lead to divisions between partners that, in a best-case scenario, distract from the work. Having everything written down and signed off in advance gives you a document to refer to when questions arise.
- Protection from state interference: In Illinois, there are laws that apply to LLCs. However, those laws are kept as generic as possible to apply them to a range of businesses. Without an Operating Agreement, your business will be subject to these default laws. Having an Operating Agreement guarantees that as long as it’s not in direct conflict with the state law, your agreement will be recognized first. Why is this important? Because generic laws will not take into account the nuances of your specific business. Your Operating Agreement will.
- Take advantage of LLC flexibility: An LLC is perhaps the most flexible of all business structures, but having an Operating Agreement is what will allow you to take advantage of everything an LLC has to offer. Within your Operating Agreement, you can specify everything from member rights and responsibilities to profit percentages and how members are allowed to leave or be added. It’s also where you will put down the steps to making major changes or dissolving your business altogether.
What do I include in my Illinois LLC Operating Agreement?
Operating Agreements vary depending on the type of business and the people involved. Operating Agreements can be customized to fit what you and your members want out of your business. For Illinois specifically, it might be beneficial to review the Illinois Limited Liability Company Act to get some ideas of what to include, such as specifics on members’ fiduciary duties.
Some items you may want to include in your Illinois Operating Agreement are:
- LLC Name
- Members’ Ownership Rights, Responsibilities, and Powers
- Profit Distributions
- Buyout and Buy-Sell Rules
- Boilerplate Language
1. LLC Name
This document will be legally binding, but it is also a document you may need to use when working with a bank on opening an account or line of credit. Investors also like to see the Operating Agreement before investing.
Because of the important legal nature of this document, make sure the name of the company is listed in the document exactly as it is listed on your Illinois Articles of Organization, which you submitted to form your LLC legally. The business name on the Articles of Organization is how your business will be legally recognized. Be sure to use the full name — don’t leave any words out or use any abbreviations.
2. Members’ Ownership Rights, Responsibilities, and Powers
You will want to include a list of the original members and what their investments were into the business. From there, document the percentage of ownership for each member. You can base this on their initial contribution, but you can also divide ownership equally among the members or use some other method to determine ownership. The important thing is that every member agrees to it.
It’s also important to document the management of the LLC. Will your business be member-managed, which will mean having members managing the business, or will you hire a manager or appoint one or more of the members to serve as manager?
The next step will be to decide how decisions will be made. Decisions could be made by majority approval, or they could be required to be unanimous. You’ll want to be specific about voting rights. You also need to decide which decisions can be made by the member-manager or manager and which decisions need a vote. Be as comprehensive as possible.
You may also want to consider including additional agreements here for each of the members. For example, you may want all members to sign a noncompete agreement or nondisclosure agreement. A conflict of interest policy is also a good idea.
If you plan on being a single-member LLC, and you think this section won’t apply to you, think again. While you are the sole member and will make all of the decisions for your business, you still need to specify that in the Operating Agreement. You’ll want to include a clause that says you are the sole-member and that all ownership rights and business decisions fall to you. Make sure to include that you have the authority to act on behalf of the LLC without holding any votes or meetings.
3. Profit Distributions
Once you have determined the percentage of ownership for each member, you can determine how to allocate the profits of the LLC to each member. This can be based on the percentage of ownership or split evenly or by some other calculation. Whatever you decide, be as clear as possible in the Operating Agreement to avoid confusion later. The timing of the distributions will also be decided and written into your Operating Agreement. Some LLCs wait to distribute only once a year, while others do it quarterly.
4. Buyout and Buy-Sell Rules
This section is for determining how to add members or manage members leaving the LLC. You will need to determine when to add a new member and the process for doing so. Decide if your members need to vote and what kind of contribution — and the minimum amount — will be required by the new member.
Decide and write into the agreement on how a member can leave, or how a member can be asked to leave, the LLC. Determine how to buy back the exiting member’s percentage of the business. Make sure to include how that price is determined.
While it may seem unlikely, this is also a good time to determine how to handle what happens to a member’s percentage in the event they die or wish to retire. You’ll need to decide if the business interest can be passed along to someone else, and then have the members update their personal estates accordingly.
Lastly, decide what will trigger the business to dissolve and what that process looks like. Put in writing what the steps are, including what kind of vote is needed.
LLC members are not required to have meetings like a corporate board of directors. However, to keep each member in the loop and make important decisions together, meetings may be a good idea for your business.
If that is the case, make sure to put the meeting obligations down in your Operating Agreement. Be sure to include attendance requirements and the ideal schedule so that everyone knows upfront what they are committing to.
The Operating Agreement is a good place to determine what kinds of records will be kept, for how long, and where they will be stored. You will want to consider the required record-keeping.
For example, the IRS and Illinois will require specific documentation for taxes. Illinois requires an annual report, so you will want to find out what is needed and make sure to keep records appropriately.
Also, look at what kinds of records the members feel are necessary for the business, along with important business formation documents. Where will the Articles of Organization be kept? You’ll need to store the Operating Agreement — along with any amendments — safely, as well.
7. Boilerplate Language
Most contracts include standard boilerplate language, and your Operating Agreement will be no different. For example, to protect your agreement from one mistake causing the entire document to become invalid, you should include a severability provision. This provision says that if one part of the agreement is invalid, it does not cause the other parts of the agreement to become invalid.
Partner With ZenBusiness for Professional Assistance
You just read through a list of things to include in your Operating Agreement — including standard legal jargon. If you are feeling overwhelmed, don’t worry. Not only is it normal, but there’s also help available. With all the details you need to think of and include in the document, consulting with a business lawyer will ensure nothing is left out.
ZenBusiness can help, too. We have an Operating Agreement template to cover the basics and help you start on your Illinois Operating Agreement. Once again, though, with each business being unique, we still recommend consulting a legal professional before completing the agreement.
Updating and Revising Your Illinois LLC Operating Agreement
When you create your Operating Agreement, you should take your time and consider all the possibilities. Having said that, over time, your business will grow, evolve, and change. Your membership may change, as well. Over the course of these changes, you will likely need to update your Operating Agreement to reflect the business accurately. A good rule of thumb is to revisit your Operating Agreement when you’re updating anything else that might have changed over the course of the year, like your registered agent and/or registered office, principal place of business, or possibly new bank accounts. Make sure when you write it initially, you include a section on how to make amendments to the Operating Agreement.
You will be the best judge of when to amend your agreement, although it’s important to understand that amendments are a big undertaking and not something to be done on a whim. You’ll want to make an amendment when there has been a big change to your business. There are, though, some recommendations on when you need to make changes. These include:
- Member or management changes: You will want to update your Operating Agreement any time you add a new member or a member leaves the business. If you decide to change your management structure from member-managed to manager-managed or vice versa, you will want to update the agreement. Any management changes should be updated in the Operating Agreement.
- Financial changes: If the members decide to change the percentage of distributions or the timing of those distributions, make sure to update the agreement. If the members decide to add more capital to the LLC, you will also want to document it in the agreement. Any additional financial decisions should be documented, as well.
Now that you know when to update your Operating Agreement, how can you do it with as little pain as possible? Making amendments to your Operating Agreement can be pretty simple, as long as you know your steps.
- Know what the state says: Each state has different statutes governing LLCs, ranging from very broad to very detailed. The state of Illinois gives broad authority to Operating Agreements; however, there are some rules it has set down about what Operating Agreements can and cannot do. It is best to become familiar with the rules in general, but you’ll want to know if something you are changing in your agreement is prohibited by the state before you make the change.
- Approve the change: If you included an amendment process in your initial Operating Agreement, this is as simple as voting and ensuring you have the appropriate amount of “yes” votes. Make sure to follow the rules you put in place so that a disgruntled member won’t have an opportunity to bring legal action against you. If you didn’t include procedures for voting, you need to follow the laws in Illinois.
- Update your document: Write out the amendment in advance of the vote so that members have it to look at before deciding. Be as clear and simple as possible, and avoid jargon. Make sure you refer to the section you are amending. Once the amendment is approved, make sure each member signs the amendment and then file it with the Operating Agreement.
Illinois Operating Agreement FAQs
- Is an LLC Operating Agreement required in Illinois?
Illinois does not require LLCs to create an Operating Agreement. However, it is recommended to have one regardless of the state requirement. Operating Agreements help protect the members’ limited liability status, provide legitimacy with third parties like banks, prevent state legal interference, and help settle disagreements with other members.
- Where do I get an LLC Operating Agreement in Illinois?
ZenBusiness can provide you with a customizable LLC Operating Agreement template to get you started. However, all businesses are unique, so you should consult with a business attorney to ensure you have included everything your business needs.
- Does a single-member LLC need an Operating Agreement in Illinois?
Single-member LLCs are not required to have an Operating Agreement and, with only one member involved, it may seem tempting to skip this step. However, even single-member LLCs will benefit from the additional protection from personal liability and the increased legitimacy an Operating Agreement provides. It is still recommended to create one.
- Do I file an LLC Operating Agreement with Illinois?
You do not need to file your Operating Agreement with the state. However, the Illinois statute does require that you keep copies of your Operating Agreement and all amendments with your other important business papers.
- Can I write my own LLC Operating Agreement in Illinois?
You are allowed to write your own Operating Agreement and have all the members sign it. However, unless you have experience creating such documents, you may come to regret that decision later.
Operating Agreements lay out how your business will be run and how decisions will be made. You don’t want to find out too late that something important was left out, or you used the wrong downloadable form. ZenBusiness can help make sure you don’t have regrets later. Our plans are affordable and offer you the peace of mind that you need to run and grow your business.
- Do I need a lawyer for an LLC Operating Agreement in Illinois?
You do not need a lawyer to create an Operating Agreement. However, you may want to consult a legal professional to review your Operating Agreement after it’s drafted and before members sign it.