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It takes more than a great idea to make a limited liability company (LLC) a success. Organization and order are essential if you want to keep your enterprise functioning effectively on a day-to-day basis. An Operating Agreement provides the clarity you need, outlining the details about who owns and manages the business and how it should be run. This document also provides some additional legal protection to you as a business owner.

When you establish a Kansas limited liability company, you should always create an Operating Agreement. The following guide provides a basic outline of what points the document should include.

What is a Kansas LLC Operating Agreement?

An Operating Agreement outlines the functional and financial details of how an LLC is run. It specifies who owns the business and how decisions regarding the business are made and provides guidelines for potential future events, like a buyout or dissolution. 

If you are establishing a Kansas LLC, you should create an Operating Agreement. Technically, the state does not require LLC owners to draft this document. You are not obligated to submit it when you file the Kansas Articles of Organization (the paperwork that formally creates your LLC and provides details like the business name and registered agent). However, legal obligations aside, having an Operating Agreement is in your best interest. 

Kansas law formally recognizes Operating Agreements for LLCs as legal documents. This means that if you are in some sort of dispute, for example, with a business partner, you can refer to the Operating Agreement for guidance — and use it as evidence in court.

The bottom line is that an Operating Agreement is useful, whether you’re managing your business alone or with partners. The investment needed to create this document is well worth it when you recognize the protections that it provides. Read on to learn just how having an Operating Agreement helps you as a business owner.

Why do I need an LLC Operating Agreement in Kansas?

The U.S. Small Business Administration (SBA) recommends the LLC structure for business owners who want “more personal protection but less formality.” The key to enjoying these advantages is the Operating Agreement. 

Once signed by all LLC members (the term for LLC owners), this is considered an official contract, and all members are bound to its terms. The Operating Agreement provides clarity, offers guidance, and further protects members.

Other benefits of a Kansas Operating Agreement include:

• Bring credibility to your business: Your business won’t be taken as seriously without an Operating Agreement. If you approach private investors for funding, this will be one of the first documents they will ask to see. If you ask the bank to open a business account, they will likewise want to see this document. Why? It shows you are running your business in an organized, orderly fashion, in line with the law.
• Helps protect your personal assets: Nobody wants to think about getting sued, but that can happen — especially in the business world. An Operating Agreement helps to delineate you, the LLC member, as a person separate from the business entity you own. This further protects you from personal liability in potential lawsuits. If someone sues your business, your non-business assets (like your home or car) are better protected.
• Make spoken agreements binding: When starting a business with friends, you likely talk through many details in person. While this isn’t a problem, you should put down any verbal agreements in writing. This can prevent headaches for all involved. If you disagree on an essential point, like capital contributions down the line, you can refer to the written Operating Agreement for clarity.
• Safeguard against state interference: Kansas recognizes the validity of an LLC Operating Agreement and, provided the document doesn’t infringe on any state or federal laws, it’s likely to be upheld in court. That said, without an Operating Agreement, if legal issues arise, the state’s default laws come into effect. For example, most states allow you to transfer business interests to family members when you pass away. However, you may prefer that your LLC members transfer their business interests to existing members. You need to stipulate this in your Operating Agreement.
• Maximize operational flexibility: There are many advantages of a Kansas LLC. The Secretary of State touts diverse benefits, from varied tax options to the flexibility of management structures. An Operating Agreement allows you to make the most of these benefits. You have the freedom to choose everything from when profits are distributed to how often members meet — you just have to put the details in the Operating Agreement.

What do I include in my Kansas LLC Operating Agreement?

While Operating Agreements are standard practice in the business world, they can differ greatly. Your business structure, management, and operations are not necessarily going to be the same as someone else’s. Your Operating Agreement must be personalized to reflect that fact. Nonetheless, most Kansas Operating Agreements will include some essential points. This section lays them out for you. 

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

1. LLC Name

The Operating Agreement must clearly state what business it governs. Include your full company name, as it appears in the Articles of Organization you filed to establish your LLC. Kansas naming requirements stipulate that an LLC name must include the words “Limited Liability Company” or some form thereof (“LLC,” “L.L.C.,” “LC,” “L.C.,” or “Limited Company”).

When writing your business name in the Operating Agreement, use the full name. This is what you have registered as the LLC’s legal name and is how it’s formally recognized in the Secretary of State’s business registrar. 

2. Ownership

One of the most important pieces of information that the Operating Agreement conveys is the owners, also called members, of the LLC. You should include the full legal names of all members and a breakdown of each member’s ownership share. 

Many startups opt to divide ownership percentages (also called “degrees of ownership” or “membership interests”) according to how much money each person put into the business to start it. If you form an LLC with four other partners, and each person puts up $2,500 of capital investment, each person would thus own 25% of the LLC.

3. Management Structure

LLCs can be managed in different ways. Clarifying the management structure in your Operating Agreement makes it clear who is responsible for what tasks. The two most common options are “member-managed” or “manager-managed.”

In a member-managed structure, the LLC’s owners (members) actively run the LLC on a day-to-day basis, making operational decisions. Alternatively, if not all the members are available to participate, they may designate a manager or managers to handle the daily running of the business. This is called a manager-managed model. The manager or managers can be members of the LLC or someone hired from outside the membership.

You’ll want your Operating Agreement to outline your management structure, particularly if you have a multi-member LLC.

4. Duties of Members and Managers

Clarifying who is in charge of day-to-day operations isn’t enough. The LLC Operating Agreement should specify the precise duties of managers and members alike. Each person involved needs to know what they should (and shouldn’t) be doing to support the LLC’s success.

For example, say you have a manager-managed LLC. The managing member needs to know what operational decisions they can make solo versus when they need to consult the members. The members also need to have their obligations outlined. Even if they aren’t active in the business on a daily basis, they likely have other responsibilities, like attending quarterly holding meetings.

5. Voting Rights and Responsibilities

Most LLCs allow their members to vote on important business decisions, like a possible buyout. The Operating Agreement should determine voting duties. When and on what issues are members required to vote? Giving a member a vote gives them power over the LLC’s future. 

Some companies choose to divide votes depending on each person’s membership share. For example, if each person owns 25% of the LLC, each person may get one vote. If one person owns 75% of the LLC, and another owns just 25%, the majority owner will get three votes compared to the minority owner’s one. 

6. Distributions

“Distributions” refer to how an LLC divides its profits among members. Again, many businesses opt to split distributions depending on membership share. So, a person with 75% ownership would get 75% of the profit share compared to the 25% ownership individual’s 25%. Profits don’t have to be divided along these lines, though.

The Operating Agreement should make it clear how profits will be split since this is often a contentious issue. It might also specify when and how (to what accounts) profits will be distributed.

7. Holding Meetings

Kansas law doesn’t require LLCs to have regular meetings like corporations. However, it’s smart to have managers and members meet regularly to touch base on any business updates. 

A comprehensive Operating Agreement could specify mandatory meetings, for example, once per quarter. This is especially important for manager-managed LLCs because it keeps members, who are removed from the day-to-day operations, involved. 

8. Buyout and Buy-Sell Rules

A buyout or buy-sell, also called a transfer of interest, results in one member’s shares in the LLC being transferred to another person. 

Operating Agreements commonly include a “right of first refusal” when it comes to transfers of interest. This allows other members active in the LLC to buy out the member who is leaving before they can offer it to a third party. 

9. Succession Planning

When an LLC member dies or retires, what happens to their shares? The Operating Agreement should also account for so-called succession planning. Determine just who can inherit the member’s shares. Members will need this information to update their personal estate planning documents, like a will or trust.

Even a single-member LLC needs to consider who will take over when they pass on and how. A “transfer on death” clause in the Operating Agreement can ensure uninterrupted operations.

10. Dissolution

In Kansas, an LLC remains valid until it is dissolved by filing the Dissolution of a Business Entity. 

Specify in your Operating Agreement what it will take to dissolve the business. For example, do all members need to vote unanimously on this decision? Who will handle the winding down of the business, like filing the final tax paperwork? Determining this now can save stress later.

11. Modifications to the Operating Agreement

An Operating Agreement isn’t a stagnant document. It can (and should) be regularly updated to reflect changes in the business structure or operations. However, given that this is a legally binding document, there should be a clear step-by-step process for amending it after your LLC formation.

Before making changes, all members should meet to discuss them. Next, a vote may be needed to agree on these changes. Finally, all members need to sign the new Operating Agreement to enforce its validity.

12. Single-Member LLC Statute

As a single-member LLC, you can forego many technicalities that a multi-member LLC requires, like holding meetings. While it might seem obvious that you, as the sole owner, can make all of the decisions about your LLC, you should specify this fact in your Operating Agreement. 

Include a single-member LLC statute in your Operating Agreement. This confirms that you are the owner and the person permitted to act on behalf of the business.

13. Severability Provision

A severability provision is found in pretty much every legal contract you’ll ever come across. It’s just a small clause asserting that if any part of the contract is deemed invalid, the rest of the contract remains valid. Basically, it’s a safeguard so that if there’s one small error in your Operating Agreement, the rest of the document is still legally enforceable. 

Updating and Revising Your Kansas LLC Operating Agreement

Once you’ve established your business, you still need to take steps on an ongoing basis to keep it legally compliant. For example, in Kansas, your LLC must file an annual report. You should also check that your Operating Agreement is still valid at least once per year. Schedule a meeting with all members to review the paperwork and ensure that it is up to date.

Beyond this annual review, you should also proactively revise your Kansas Operating Agreement whenever changes are made to your business membership, management, or operational structure. Basically, whenever any detail mentioned in the Operating Agreement is modified, the written document needs to reflect this. For example, you might decide to change the time of year when you distribute profits, or add a new member to the team — or even change your management model, shifting from a manager-managed to a member-managed structure. Whatever the change may be, the Operating Agreement must show it.

When updating your Kansas LLC Operating Agreement, you’ll have to take the following steps:

1. Review the Operating Agreement for guidance on how to modify the document. If you followed the basic points above, the Operating Agreement should include details on how it may be changed (like who needs to vote on changes).
2. Update the Operating Agreement in writing. 
3. Have members vote and sign off on the amended Operating Agreement.

Whenever you make changes to the Operating Agreement, you should also check whether you need to make changes to your Kansas Articles of Organization. This is the paperwork you filed with the Secretary of State to establish your LLC formally. 

Amendments to key points like membership or the LLC name need to be communicated to the Secretary of State. You can do this by completing the Business Entity Certificate of Amendment. For LLCs, a filing fee of $35 must be paid.

Partner With ZenBusiness for Professional Assistance

If that list seems daunting, don’t stress: ZenBusiness has handy resources to help. Our Operating Agreement template includes all the basic points you need to cover as you craft your Kansas Operating Agreement. However, keep in mind that every business is unique, so you should have an attorney review the final product to ensure you haven’t missed anything relevant to your one-of-a-kind enterprise.