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As a new business owner, there’s a lot to think about as you launch your company. It’s an exciting time, for sure. Owning a business will change your life, but it can also be an overwhelming process.
Creating an Operating Agreement for your company will alleviate some of your stress as you get your business off the ground. This valuable written document — signed and approved by all owners — outlines how your company will operate. It delineates everything from its ownership structure to how it’s managed from day to day.
In addition to including important information about the operations and structure, this agreement is designed to safeguard the owners’ personal assets.
Drafting a comprehensive Massachusetts LLC Operating Agreement offers an extra layer of protection as you grow your company. Read on to learn how to write this document for your business and which terms should be included in your Operating Agreement.
If you’re creating a limited liability company, often referred to as an LLC, in Massachusetts, you should draft an Operating Agreement to help better manage your business.
An LLC is one of the several types of structures you can choose from when launching a company. This business type can be owned by one or more individuals, who are referred to as members.
By choosing to set up an LLC, you’re setting up a new legal entity that is separate from your company’s members. This reduces the personal liability of your LLC’s owners and protects your personal assets if your business is ever sued.
Like many states, Massachusetts doesn’t require an LLC to file an Operating Agreement during its formation. Still, it’s recommended that your company write and adopt an Operating Agreement, as it’s such a useful document. It could mean the difference between success and failure.
Your Massachusetts LLC Operating Agreement is integral to your business. This guiding document determines how your company will make decisions regarding finances and operations. It also provides guidelines that your owners and managers must follow. Essentially, this agreement determines how your company operates.
Although an Operating Agreement isn’t required in Massachusetts, if your company doesn’t have one in place, it will be governed by the Massachusetts Limited Liability Company Act by default.
You’re not required to file an Operating Agreement in Massachusetts, so there is no filing fee.It is advised, though, that you have your Operating Agreement drafted at the time you file your LLC’s Certificate of Organization. It costs $500 to file for this certificate in Massachusetts.
Although you aren’t required to file an Operating Agreement for your LLC in Massachusetts, it’s still important for your business to have one. There are many benefits associated with adopting such an agreement.
It provides the structure needed to guide your business operations. Once in place, it also is designed to protect your LLC’s limited liability status, according to the U.S. Small Business Administration (SBA).
Operating Agreements aren’t required in Massachusetts. But if you don’t establish one for your company, its governance will default to the state’s general laws for LLCs. This is a lot of control to give up as a business owner. By writing your own Operating Agreement, you’re setting your own rules and regulations so that you can run your company the way you’d like.
This document will also come in handy during disputes between members of your LLC. Even if you go into business with friends or family, there might be moments where you’re not all on the same page. Your Operating Agreement lays out all of the guidelines for owners, managers, and employees to follow. Having it all in writing makes it easier to resolve any conflicts.
Additionally, when opening a business account or applying for loans, many banks and lenders will want to see a copy of your Operating Agreement.
Every business is unique, and so are their Operating Agreements. This means no two Operating Agreements will be the same, and there is no set form for creating one.
The terms of each Operating Agreement will depend on your business. What industry are you in? What is the size and scope of your company? How do your members want the LLC to operate?
However, according to the SBA, there are some items that every Massachusetts LLC Operating Agreement will want to include:
The name of the company on your Operating Agreement should be written exactly the same as it appears on your Certificate of Organization that you file with the state at the time of your company’s formation.
The name should be spelled the same way in both documents. And remember, in Massachusetts, the name of your LLC should include the words “Limited Liability Company” or “Limited Company” or an acceptable abbreviation, such as “LLC,” “L.L.C.,” “L.C.,” or “LC.”
Your Operating Agreement should include the list of all owners (a.k.a. members). This section should include the ownership percentages of members or membership interest. You can determine this figure in several ways. The easiest way would be to base it solely on the amount of money each member invested in the LLC. But if one member invested less but is more involved in managing the company, you might want to consider giving them a higher ownership percentage.
At the end of the day, it comes down to how your company is structured and what your members are most comfortable with.
When it comes to management of the company, there are two types of management structure to choose from when forming your LLC: one that is member-managed or one that is manager-managed.
Unless stated otherwise in your Operating Agreement, in Massachusetts, member-managed is the default management structure for LLCs.
You need to determine which management style works best for your company. How involved do your members want to be? Do they want to handle the day-to-day operations? Or would they prefer to quietly invest in your LLC and only vote on big decisions?
In a member-managed LLC, the company’s owners oversee operations.
In a manager-managed LLC, an individual — who may or may not be a member — takes on a managerial role to run the company. They oversee the day-to-day business decisions and operations, which members typically aren’t involved in.
In this section, you’ll determine what is expected of all members, managers, and employees.
All members are required to take on specific duties, even if it simply means voting on various topics at the annual meetings.
Other members might choose to be more involved in the company’s operations, though, and this section will define this involvement.
Your LLC’s members have the right and responsibility to vote on various issues related to the organization.
This section will determine how their vote is counted. You can choose whether members vote separately or as part of a group of members and managers.
You will also establish when, where, and how voting takes place.
The profits of an LLC are distributed among its members. Your Operating Agreement determines how this distribution takes place.
You have some flexibility with how this is done. It just needs to be clearly written in your agreement. It should state what percentage of profits each member receives at the end of each year. This amount can be based on their ownership percentage, their level of involvement, or other factors.
There are no legal requirements for when and how your LLC hosts member meetings.
Still, these meetings are important for running your business and making decisions. So, it’s advisable that your members include guidelines for meetings in your Operating Agreement. This will establish when, where, and how they take place.
It’s common for members to resign from and join LLCs. To make this transition easier, your Operating Agreement should lay out the process for buyouts and welcoming new members.
Members might resign for any reason — retirement, health issues, or a desire to change fields and pursue other interests. What happens to their ownership percentage when they leave? How and when do they receive these funds?
At the same time, you need to determine how to bring new members on board. Will you require a unanimous or majority vote of current members to add someone new to the ownership team? How much will you require a new member to invest?
You might also decide that current members have first dibs on that ownership portion in the company as members depart.
Your Operating Agreement should also consider what happens should your members choose to dissolve the LLC.
First, decide what this process will look like. How many member votes will you require to dissolve the company?
You’ll also need to determine what happens to the LLC’s remaining assets. After your creditors are paid, how will the rest be distributed among members?
When shutting down a company, there are a lot of loose ends to consider. They all need to be handled appropriately to avoid any legal or financial ramifications.
When you dissolve your LLC in Massachusetts, you must also file a Certificate of Cancellation with the state. There is no cost to file this, but you do need to record it with the state. Otherwise, your business will be considered active, and you could be responsible for taxes and other annual fees.
At any point, your members can modify your Massachusetts LLC Operating Agreement. The document should lay out how these changes are made, though.
Members can vote to add sections to the agreement or remove terms that no longer suit the company’s needs. They also might opt to tweak existing terms.
Your Operating Agreement should clearly state how voting on these changes takes place. The biggest thing you’ll need to determine is how many votes are required to make changes to the document. Do you need a unanimous vote to update it? Or will a supermajority or majority vote allow the changes to pass?
Remember, if you change your Operating Agreement, and it no longer matches your Certificate of Organization filed with the state, you’ll need to update that document, as well.
You don’t need to be a legal professional to write an Operating Agreement that works for your LLC. Still, you’ll need to put in quite a bit of research to create a comprehensive document for your company.
If this seems overwhelming, consider hiring a business attorney to help you draft your LLC’s Operating Agreement. At the very least, they can review your document to ensure it’s legally sound and doesn’t violate Massachusetts law.
ZenBusiness is also an excellent resource for creating your Massachusetts LLC Operating Agreement. Our template is a handy tool to reference while crafting your company’s Operating Agreement.
Many choose to create an LLC over other types of businesses because it’s one of the more flexible structures available.
The Operating Agreement that your membership approves when the company is launched will change over time as your business grows and evolves. It’s a fluid document that can be adapted to your LLC’s changing business needs.
Whenever any major change takes place for your LLC, your membership team should review and update the Operating Agreement to reflect this.
There are many scenarios where you might consider updating your Operating Agreement. If a member leaves the LLC, you’ll need to remove them from the document’s section regarding ownership structure. Also, to accommodate your company’s growth over time, you might decide to switch from a member-managed to a manager-managed structure. And if there are updates to state or federal laws, your Operating Agreement should reflect compliance with them.
Revising your Operating Agreement is a simple process. The first thing that needs to happen is your members should vote on the matter at hand. This can take place at a regularly scheduled membership meeting or during a special meeting called to address an emergency or pressing circumstance.
After this vote, once your members have come to a decision, these changes should be put in writing and added to your Operating Agreement. Then, all members should sign and acknowledge the new version of your Operating Agreement. This document doesn’t get filed with the state, but it should go on file at your company’s primary business location.
If these changes affect your Certificate of Organization — such as changing the company’s name or updating the names of owners — you’ll need to update these changes at the state level.
To make sure you don’t forget about amending your Operating Agreement with any changes, consider reviewing it when you file your annual report. You can also look at it when you’re updating your resident agent and/or registered office.
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