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This helpful guide will offer a few tips on what should be included in your Michigan LLC Operating Agreement.

What is a Michigan LLC Operating Agreement?

An Operating Agreement is a legal document that lays out the details of how your small business will run, who is responsible for what, how rules are set, and so on. It allows you to create the rules and procedures for your business. 

Without an Operating Agreement, any problems or disagreements among LLC owners (known as “members”) will be subject to the default rules of the state, which are general and very often do not align well with the specifics of each business.

While an Operating Agreement is not explicitly required in the state of Michigan, having one is always a good idea to protect your business and to have a written agreement between those involved and avoid disagreements down the road.

It’s important to note that Operating Agreements are legally binding. When creating one, you want to make sure you do so carefully. It can be helpful to use a template to get started and have a legal professional look it over before signing.

You do not need to file your Operating Agreement with the state, but you should keep it in a safe place with your other important business documents.

Why do I need an LLC Operating Agreement in Michigan?

While Operating Agreements may not be legally required, going without one can leave your business open to a whole host of legal troubles. In the absence of an Operating Agreement, all disputes about any aspect of your business will be subject to default state laws or a judge’s decision, as opposed to being subject to the rules that you and your business partners agreed on at the beginning. 

More specifically, the reasons to have an Operating Agreement include:

• Protection of your business’s limited liability status: An Operating Agreement can more explicitly separate your business and associated assets from the members and their personal assets.
• Clarification of verbal agreements: It’s always a good idea to put agreements in writing to avoid disagreements and failing memories. 
• Protection of agreements in the eyes of the state of Michigan: By having an Operating Agreement, the rules that govern your business are created by you and not the state.
• The flexibility offered by an LLC business type: LLCs have a lot of leeway in how they are run, what their management structure is, and so on. But with great flexibility comes the potential for confusion and disagreement. Having an Operating Agreement allows you to establish what choices you can make for your business. 
• Ability to open business bank accounts and lines of credit: Banks, lenders, and vendors sometimes want to see an Operating Agreement before working with you. Having one can help legitimize your business.

What do I include in my Michigan LLC Operating Agreement?

The short answer is “everything you can think of and want to be able to enforce.” Operating Agreements allow you to set the rules and regulations for your business. It’s better to include too much than not enough. 

Items in your Michigan Operating Agreement may include:

1. LLC Name

It might seem obvious, but your Operating Agreement should include the name of the company. More specifically, it should include the exact name of your business, including an LLC designator, as you entered it when you filed your Articles of Organization with the state.

2. Ownership

For single-member LLCs, this part is straightforward — there is only one owner, and they own 100% of the business. However, if you have multiple members of the company, you will need to spell out how you are splitting ownership. 

You may choose to give each member an equal share to align ownership percentage with capital contributions or by some other metric. Just make sure that the total of all ownership percentages equals 100%.

3. Management Structure

LLCs may be managed by their members (these are referred to as owner-managed or member-managed LLCs) or by one or more managers with or without any stake in ownership (manager-managed LLCs). 

Make a deliberate choice as to which ownership structure makes sense for you and spell out management of the company in the Operating Agreement. You should also include mention of what sort of rights and responsibilities both members and managers have.  

4. Duties of Members and Managers

The duties of members and managers can vary considerably from business to business. In some cases, members might have no other obligations other than to attend annual meetings. In others, they might serve in a management role and be completely responsible for all aspects of the business.

Your Operating Agreement should name the members and managers and indicate what is expected of each and their voting rights and oversight.

5. Voting Rights and Responsibilities

There can be a lot to consider when it comes to voting rights and responsibilities. Do you want to require all those with voting power to be in attendance for any votes? Do you want members to be responsible for voting on certain issues, but have managers responsible for other issues? Will everyone’s vote be equally weighted, or will it vary based on ownership percentage or another metric? Which items can be voted in by a simple majority, and which require a unanimous vote? 

Try to imagine all possible voting scenarios and make sure you spell out the details for each. This will simplify things for you as issues that need to be voted on come up.

6. Distributions

Businesses may see any combination of profits and losses from year to year, and these need to be divided among members. Will everyone share in the profits equally, or will it vary based on ownership percentage or capital contributions? 

You should also include how these distributions will occur and when. Will it happen monthly? At the end of the fiscal year? Will members receive checks or direct deposit? Who will be responsible for making these distributions? What happens when there are losses? Will members need to contribute more capital?

7. Holding Meetings

LLCs are under no obligation to hold regular meetings, but it is often a good idea to do so. Annual meetings are common and are a great way to assess the year’s progress, vote on new issues, and make plans going forward.

You may wish to have meetings more or less frequently or in response to certain events. In your Operating Agreement, identify when and how often you will hold meetings and who is required to attend. By stating required attendance in this agreement, you will have grounds to vote out any members who stop showing up, so it is always a good idea to include as many details as possible.

8. Buyout and Buy-Sell Rules

Any business with multiple members may see turnover and new members from time to time. Sometimes, members want out and would like to be free of the business for whatever reason. Your Operating Agreement should clarify the process for this. How will a buyout price be determined? How will it be paid?

Bringing in new members is another consideration. Must new members be voted on? Unanimously approved? Will new members be required to make a certain capital contribution?

9. Succession Planning

You should also include details of what will happen to a member’s ownership percentage if they pass away. Do you want to allow them to leave their interest in the company to a friend or family member? If so, what sort of voting rights would this new member have? Do you want to place limitations on who they can leave their interest in the business to?

10. Dissolution

If or when the time comes to close up shop, you should have a plan for how this will be handled, as well. Closing a business is almost never as easy as selling the shop and moving on. There are assets to be distributed, possible debts to be resolved, and so on.

In your Operating Agreement, you need to spell out the details and steps of how dissolution will be handled. What is the method by which assets will be sold or divided among members? Who organizes this process and makes sure it is carried out.

You should also have a clear procedure for deciding to dissolve. Does it require a unanimous vote? Should anyone who does not want to dissolve the business be given the option to buy out other members? How is this decision made and agreed on?

When dissolving a business, there is also paperwork to attend to. In Michigan, you must file a Certificate of Dissolution with the Michigan Department of Licensing and Regulatory Affairs and pay a $10 processing fee.

11. Modifications to the Operating Agreement

Setting up your initial Operating Agreement requires careful planning and a lot of predicting what issues you might encounter down the line. However, as you start your business, and your business evolves, new issues will emerge, and your needs may change. 

As such, you should include information in your Operating Agreement outlining the procedure by which the agreement can be modified. This includes how changes will be voted on, who can vote on these changes, what percentage of the vote is required for approval, and who is responsible for tending to the paperwork.

12. Single-Member LLC Statue

Many people who start single-member LLCs wonder if they need an Operating Agreement at all. Operating Agreements are useful, regardless if only one person is involved or not. 

An Operating Agreement allows you to consider the aspects of your business carefully before starting, which has its own value. It also gives you legitimacy in the eyes of financial institutions and third-party vendors and provides another layer of protection between your personal and business assets.

If you are creating a single-member Operating Agreement, you should include wording that specifies that you have 100% ownership, voting rights, and will make all of the business decisions.

13. Severability Provision

Lastly, your Operating Agreement should include a certain boilerplate clause found in many legal contracts. This is wording stating that if any part of the agreement is found to be unenforceable for whatever reason, the rest of the agreement remains intact and does not become entirely void. 

This protects you if there is an error somewhere in your agreement and creates a legal basis for the remainder of your contract to be valid. 

ZenBusiness has resources to help you make sure you get started with an Operating Agreement today. You may also wish to seek the advice of a legal professional to make sure everything is in order.

Updating and Revising Your Michigan LLC Operating Agreement

Not only should your Operating Agreement have detailed plans for how to make changes to it, but you should also plan to revisit your agreement regularly and consider if any changes need to be made. A good rule of thumb is to look at your Operating Agreement around the same time you have to file your annual report where you’ll also be updating your registered agent and registered office if needed.

It’s often a good idea to hold a membership meeting to consider any needed changes on an annual basis or any time any major changes are made, such as a member leaving or a new member coming aboard.

When updates are voted on, you can choose to create and sign a document indicating the amendments or revise the original agreement in its entirety and re-sign.

You should also keep in mind that sometimes business changes need to be documented with the state. If any of the information that also appeared in your Articles of Incorporation has changed, you should file a Certificate of Amendment with Michigan and pay the associated $25 fee.

Partner With ZenBusiness for Professional Assistance

Perhaps the idea of combining all of this information into a cohesive Michigan LLC Operating Agreement seems overwhelming to you. You do not have to create your Operating Agreement alone! ZenBusiness has an excellent resource to support you as you draft this all-important piece of your future company. Our customizable Operating Agreement template can get you started on the right path.