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Starting a limited liability company (LLC) is an exciting prospect — but it does require you to jump through some administrative hoops. An Operating Agreement is one important document that any LLC owner should create as part of the startup process. This essential paperwork details who owns the business and their rights and duties relating to the business. It also provides guidelines for how the business should be run on a daily basis.

If you are founding an LLC in Maryland, you want to have an Operating Agreement before you even open your doors. Read on to discover what to include in this essential document.

What is a Maryland LLC Operating Agreement?

An Operating Agreement is a legal document that specifies essential details about who owns a business and how it’s run. If you are establishing a Maryland LLC, this is an essential piece of paperwork. It brings clarity to your business and helps protect you, the owner, personally from legal repercussions if the business is sued.

Your Operating Agreement covers everything from what capital contribution a person needs to make to buy into the LLC to how profits are distributed to owners. This document becomes legally binding when all members — the term for LLC owners — have signed it.

To create a Maryland LLC, you must file the Articles of Organization with the state, specifying details like the official name and registered agent. Although you don’t have to submit an Operating Agreement to the state, it’s wise to create one anyway. According to Maryland law §4A-402, “Members may enter into an Operating Agreement to regulate or establish any aspect of the affairs of the limited liability company or the relations of its members.”

Put plainly, your Operating Agreement can govern pretty much every aspect of your business affairs, clarifying ownership, processes, and daily operations. With this paperwork in place, you will avoid confusion and disputes and pave the path for streamlined business operations. 

Why do I need an LLC Operating Agreement in Maryland?

The U.S. Small Business Administration (SBA) suggests that an LLC is ideal for those seeking “a business structure with more personal protection but less formality.” An LLC doesn’t have to adhere to the more stringent requirements put in place for other business models, like corporations.

The Operating Agreement is the key to the LLC’s success. When signed by all of the LLC’s members (owners), this document is considered legally binding. It clearly outlines who runs your business and how. Without it, you run the risk of confusion, disputes, and — in the worst-case scenario — a possible lack of compliance with state or federal business law. 

Here are some of the advantages offered by a Maryland LLC Operating Agreement:

• Legitimize your LLC: An Operating Agreement is often requested in business transactions. You may be asked to show this document if you try to open a business bank account, for example, or when you discuss funding with a potential private investor. Having an Operating Agreement helps your business to be taken seriously when you engage in these kinds of conversations.
• Clarify verbal agreements: Some successful businesses have been born out of late-night chats with friends — there’s no doubt about that. However, every verbal agreement you’ve made with other members in your LLC should be put into writing. Having precise terms written on paper will prevent misunderstandings and foster a positive working relationship.
• Avoid state interference: Maryland recognizes and respects the validity of an LLC Operating Agreement. That said, if you do not have an Operating Agreement, the state has no choice but to “go by the book” when it comes to legal matters surrounding your business. For example, most default state laws determine profit distribution based on each member’s ownership interest. If you want to divide the profits otherwise, you can specify this in the Operating Agreement.
• Take advantage of the flexibility an LLC offers: LLCs are a popular business model because of the flexibility they allow. An Operating Agreement gives you the power to make the most of that flexibility. The more comprehensive your Operating Agreement is, the more control you have over every detail of how the business is run.
• Keep your personal assets safe: Even a well-run business can run into legal troubles. You can never know if a disgruntled ex-employee or unhappy customer will file a lawsuit, for example. In case this happens, an Operating Agreement helps to keep your personal assets safe by differentiating you, the business owner, from the business entity. You are exempt from personal liability. 

What do I include in my Maryland LLC Operating Agreement?

While every Maryland LLC should have an Operating Agreement, no two businesses are identical. You need to create a tailor-made document that reflects your business’s unique characteristics in terms of membership, management, and day-to-day operations. Still, there are certain basic pieces of information that every Operating Agreement should include. This section breaks it down for you. 

Here are some things you may want to include in your Maryland Operating Agreement:

1. LLC Name

It might seem obvious, but it’s an important point — the Operating Agreement must precisely specify what business it applies to. This means that you have to provide the full legal business name, just as it appears in the Articles of Organization you initially filed with the Maryland Secretary of State. Don’t use any abbreviation or even a “doing business as” (DBA) name.

Maryland is very specific about what you can name your LLC, and you want to make sure the name on the Operating Agreement matches the legal name recognized by the state. For example, every LLC business name must include some variation of “Limited Liability Company” at the end, such as “LLC,” “L.L.C.,” “L.C.,” or “LC.”

2. Ownership

The Operating Agreement should identify the LLC’s owners, in line with information provided in the Articles of Organization. The members’ names, addresses, and titles should be included. Additionally, the Operating Agreement should clarify the so-called “degrees of ownership.” This term refers to the percentage of the business that each member owns. 

You will likely opt to have ownership reflect each person’s initial investment in the business. If one person put in $1,000 worth of capital, for example, and another person put in $4,000 worth of capital, the minority owner would own 20%, and the majority owner would own 80%.

3. Management Structure

There are two primary means of managing an LLC’s daily operations — either through the members or a manager (or multiple managers). In a so-called “member-managed” structure, the actual owners take part in running the business from day to day. 

In a “manager-managed” structure, the members appoint one or more managers to run the company. This could be one or more of the members, someone hired from outside the LLC membership, or a combination of the two.

The Operating Agreement should clarify which management structure you plan to use and how it may be changed.

4. Duties of Members and Managers

The Operating Agreement must also go into detail regarding managers’ and members’ obligations to the LLC. Every person involved should have their tasks spelled out for them. This allows for streamlined operations and prevents confusion.

For a manager, that might involve day-to-day operational duties like hiring and firing. For a member, it might involve attending quarterly meetings to review business reports and vote on proposals. Whatever the case may be, these duties should be spelled out from the start (although they can be amended later).

5. Voting Rights and Responsibilities

Voting is one of the most significant responsibilities (and privileges) that a member can have. In an LLC, votes may be used to determine decisions that impact the business’s future, such as dissolution or new membership. You want to be clear about who can vote on these points and how much of a say they have.

Most businesses opt for a voting structure that parallels the membership structure. So, if one member owns 80% of the business, and another owns just 10%, the 80% owner will have significantly more voting power.

6. Distributions

Distribution describes how the business’s profits and losses are split among members. The Operating Agreement should state how profits are distributed (for example, in line with membership shares) and when profits will be distributed. Money is always a touchy subject in business, so you want to be clear on this point.

7. Holding Meetings

Corporations are legally required to have regular shareholder meetings. LLCs are not subject to any such legal requirement. That said, it’s wise to require periodic meetings in your Operating Agreement. It’s good business sense to have members and managers meet regularly to review business updates. This is also an opportunity to conduct essential activities like votes.

Including meetings as a requirement in the Operating Agreement now will spare you stress later. Every member will already know upfront that this is part of their obligation to the LLC. You won’t have to deal with trying to convince people to attend these meetings in the future.

8. Buyout and Buy-Sell Rules

Your Operating Agreement must detail what steps need to be taken for members to come and go. If a new member joins the LLC, what capital investment do they need to make? Who needs to vote on their acceptance?

Alternatively, consider what should happen to a member’s ownership percentage when they leave. Are they allowed to transfer their interests to a third party? An Operating Agreement might specify that existing members have first rights on these interests, for example.

9. Succession Planning

Succession planning refers to what happens to an LLC member’s stake in the business when they retire or pass away. The Operating Agreement should clarify whether they can leave their membership percentage to just anybody or whether a priority claim should be given to existing members.

10. Dissolution

When an LLC’s members all decide they want to stop operating the business, it needs to be dissolved. The Operating Agreement should specify what it takes to reach dissolution — do all members need to unanimously agree on this step? It should also lay out the process for winding down the business, such as filing the Maryland Articles of Cancellation.

11. Modifications to the Operating Agreement

One of the best things about Operating Agreements is that they can be changed. This isn’t a document you draft once and never touch again. You can (and should) update the Operating Agreement when any modifications are made to the business structure or operations. That said, you need guidelines in place for how the Operating Agreement may be amended.

For example, you should specify that members need to vote on proposed changes to the Operating Agreement. Do they need to vote unanimously, or is only a majority vote needed? Additionally, you can specify that all members must sign off on a new Operating Agreement. This is what makes it a legally binding contract.

12. Single-Member LLC Statute

As a single-member LLC with no other owners, it might seem like an Operating Agreement is largely irrelevant. After all, points like voting and holding meetings aren’t that pressing when you’re the only person running the show.

Nonetheless, you can benefit from an Operating Agreement for the legal protection it provides. The document should also include a single-member LLC statute, which asserts that you are the LLC’s sole owner and the only individual who can make decisions about its operations.

13. Severability Provision

A severability provision is a basic boilerplate clause found in pretty much every legal document. It basically says that if one part of a contract is found to be invalid, it doesn’t invalidate all the other parts of the contract. Include a severability provision in your Operating Agreement so that if one part is erroneous, the agreement as a whole still stands.

Updating and Revising Your Maryland LLC Operating Agreement

As a business owner, it’s your responsibility to keep essential paperwork governing your company up to date. This includes the Operating Agreement. This is a living document that needs to be updated regularly to ensure it meets your business’s needs. Once per year (at the least), bring all members together to review the Operating Agreement.

Take the time to read every point. You want to check not only that the provisions are still correct but also that they still meet your operational needs. Say you have a member-managed structure now — maybe you want to change it to a manager-managed structure. Reassessing the Operating Agreement is also an opportunity to discuss such possibilities.

In addition to reevaluating the Operating Agreement annually, you also need to change it whenever the financial or functional details of your business operations are modified. For example, if you bring on a new member or change the profit distribution scheme, this needs to be made clear in the Operating Agreement.

Once you’ve determined that changes need to be made to your Maryland Operating Agreement, implementing them is simple. It just takes three steps

1. Refer to your Operating Agreement for guidance on what it takes to change the document itself. You likely need to hold a member vote.
2. Revise the Operating Agreement in writing.
3. Have members sign off on the new Operating Agreement.

Last but not least, check whether the changes you’ve made to the Operating Agreement need to be flagged with the state. Look at your original Articles of Organization to see whether any of the details it contains have been updated. For example, if you’ve brought on a new member, this needs to be amended in your Operating Agreement and possibly also in the state’s records. To update this in Maryland, complete the Articles of Amendment for a Maryland LLC and pay the $100 filing fee (plus 3% for credit card or PayPal or $3 for eCheck).

Partner With ZenBusiness for Professional Assistance

Does that list look daunting to you? Don’t sweat it. You can use the ZenBusiness Operating Agreement template to help draft your document. This existing template lays out the basics you need to cover. However, since your business is one-of-a-kind, you should still have a lawyer review the final Operating Agreement to ensure all relevant points have been addressed.