After you file your Articles of Organization for your limited liability company (LLC) — officially registering your business with the Minnesota Secretary of State — the next big step is to create an Operating Agreement.
This guide will outline what an Operating Agreement is, why it’s important for your Minnesota LLC, how to create one that fits your business needs, and what to do if your Operating Agreement needs revisions down the road.
An Operating Agreement is a document that you create with other members (owners) of your new LLC. It is a key governing document and acts as a legally binding agreement about the rules and procedures for running your business, including details such as what each individual is responsible for, how profits are shared, how changes can be made, and much more.
Without an Operating Agreement, any problems or disagreements among members of the LLC 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 you are not legally required to have an Operating Agreement in the state of Minnesota, it’s a good idea to draft one to clarify your business operations and protect all members involved.
Once you create an Operating Agreement and all members sign it, you should keep this document safe with other important business documents. You are not required to file it with the state, but you will need to produce it if you encounter a legal dispute related to something included in it.
Without an Operating Agreement, all disputes about ownership, contributions, duties, changes, etc., will default to whatever Minnesota state law requires and that a judge decides. Since every business is different, general laws often do not fit well and may have significant negative consequences in such a situation. By creating an Operating Agreement, you can establish clear legal guidelines that apply to your business.
More specifically, the reasons to have an Operating Agreement include:
When creating an Operating Agreement, you and your fellow members decide how ownership will be divided, the responsibilities for each member, what your management structure will be, and more. Try to think of every possible scenario you might encounter in the operation of your business and determine how it will be handled.
One place to start is to review Minnesota Statutes Chapter 322c within the Minnesota Revised Uniform Limited Liability Company Act that provides insight into an Operating Agreement’s scope, functions, and limitations.
To help make sure you don’t leave anything out, here are several of the main items to consider including in your Minnesota Operating Agreement:
The name you put in the Operating Agreement needs to be identical to the one you entered in your Articles of Organization when you registered your business with Minnesota. This means all spelling and punctuation must be consistent, and the LLC designator will need to match, as well.
You don’t want your agreement to end up being unenforceable due to a lack of care with something as simple as entering the legal name of the company.
LLCs with more than one member must consider how ownership will be divided. Does everyone have an equal share? Is the ownership percentage based on capital contribution or another metric?
In your Operating Agreement, list the full names and contact information for each member with their membership interest or specific ownership percentage. The total percentage of all members should equal 100%.
LLCs are typically managed in two ways: by the members (member-managed) or managers who are appointed or hired by the members (manager-managed). A manager can be a member or someone hired from outside the LLC membership. Management of the company can affect how responsibilities are assigned and other aspects of your business. Be sure to spell out who is in what role and their authorities and voting rights.
Duties of members and managers can vary considerably from business to business. In some cases, members have no other obligations other than to attend annual meetings. In others, they may serve in a management role and be completely responsible for all aspects of the business or have specific fiduciary duties.
Your Operating Agreement should name the members and managers and indicate what is expected of each and their voting rights and oversight.
It’s important to include the details of voting power for your business entity. While some LLCs choose to have all members’ votes count equally, others may weigh votes based on percentage ownership or other factors.
There may be certain types of decisions that should only be voted on by managers, while others you may want to leave to the purview of members only. Other considerations to include are what percentages are needed for items to pass a vote. You may wish some decisions to be passed by a simple majority while requiring that others (such as voting in a new member) be unanimous.
As your business earns money, you will need a method to distribute the profits among members. In your Operating Agreement, you may also specify that a certain percentage of profits be funneled back into the business.
Your Operating Agreement should detail how profits are shared, how frequently this distribution happens, and who is responsible for enacting the payments.
While LLCs are not required to hold meetings, it’s often a good idea to establish a regular meeting schedule and criteria that trigger an emergency meeting.
For example, annual meetings are a great way to assess your business and provide an opportunity to determine if any changes need to be made to your Operating Agreement. If your company plans on a big change or wants to bring on a new member, that might also be a good time for a meeting.
Whatever you want your meeting schedule or policy to be, it’s a good idea to include it in the Operating Agreement. That way, you have it on paper as a guideline and can refer to it if members fail to show up.
Since all current members are vested in the company, if one leaves, they need to be compensated for their portion of the ownership. You should establish a method by which you determine the amount of this compensation, how it will be paid, and whether it will require additional capital contributions from the remaining members.
The departing member’s ownership percentage will also need to be redistributed, so be sure to include the details for handling that.
Additionally, you need a plan for adding new members. Will you require a unanimous vote, for example? And will a new member be required to contribute capital? How much? How will the ownership percentages be readjusted accordingly?
It’s also a good idea to have a plan should one of the members pass away. This is where succession planning comes in.
Often, people like to appoint a successor in their will — a friend or family member they’d like to leave their portion of the business to. You and the other LLC members should decide if you want any limits on who can be appointed as a successor and what rights the successor might have in the company.
There should also be a plan regarding what to do with a member’s percentage of the company if they haven’t appointed a successor. Should it go to their next of kin? Be redistributed among the current members? Once this is spelled out in the Operating Agreement, all members can update their wills to align with whatever is decided.
Your business may end someday, and you should have a plan for how assets will be divided and who is responsible for the paperwork.
In your Operating Agreement, you should first spell out how the decision will be made to end the business. Will a vote be called? Must it be unanimous? When a business is dissolved, there may be any combination of assets and debts to attend to. You should also have a plan for handling this.
You should also designate who is responsible for completing the paperwork. In Minnesota, you must first file a Statement of Dissolution, which requires a $35 fee if filing by mail, and follow this up with a Statement of Termination to terminate your business (requiring another $35 fee).
Although your Operating Agreement is legally binding, it isn’t unchangeable. In your initial Operating Agreement, you should establish how it may be changed as your business needs or plans change and evolve.
This might mean that you establish a voting process by which changes may be voted on and then establish what percentage of a vote is required to adopt a modification. You should also designate a member responsible for creating the necessary amendments or revisions when changes are voted in.
If you are starting a single-member LLC, you might wonder how much of this Operating Agreement business really applies to you. It turns out that Operating Agreements are even important for single-member LLCs.
Even though you won’t need to spend much time figuring out how to split the voting rights and distribute responsibilities, you should include a statement in your agreement that you are the sole owner with 100% voting rights and the authority to make all decisions on behalf of the business.
In addition, the Operating Agreement will help keep your personal and business assets separate and make it easier for you to obtain business funding from different sources.
Lastly, your Operating Agreement should include a certain boilerplate clause found in many legal contracts 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.
Minnesota Business Resources
Reduce the time you spend crafting an Operating Agreement by using a template. In addition to reducing the amount of time required to draft one, you can also be assured that you’re covering every topic necessary to protect your LLC.
Although drafting an operating might seem like an unnecessary step, it can be incredibly beneficial to your LLC. An Operating Agreement can help you avoid disagreements, secure personal assets, open a business bank account, and more. By using a template to help you draft your Operating Agreement and then having a legal professional review the final document, you are preparing your business for the future and securing it from mishaps.
It’s a good idea to revisit your Operating Agreement regularly to determine if changes need to be made to remain compliant, especially if state laws change or there is a significant change to your business like a change in membership or management structure.
A good rule of thumb is to revisit your Operating Agreement at least once a calendar year. You can make a habit of revisiting it when you’re preparing your annual report since you’ll also be updating your registered agent and/or registered office during this time.
Updating your agreement is simple. You can type up amendments or revise the document in its entirety. Once all members sign the new document, you just need to store it in a safe place.
However, when you update your Operating Agreement, you may also need to make similar changes to your Articles of Organization. If this is the case, be sure to file an Amendment to Articles of Organization form with the state of Minnesota and pay the associated $35 filing fee if filing by mail or $55 if filing online or in-person.
Minnesota does not require Operating Agreements, but it is always in your best interest to have one.
You can write one from scratch or utilize an Operating Agreement template to get started. You may also wish to seek the assistance of a legal professional to make sure everything is in order.
Much like multi-member LLCs, Operating Agreements also help protect single-member LLCs and further legitimize those businesses in the eyes of financial institutions.
You do not need to file your Operating Agreement with the state. Just keep it in a safe place with your other important business documents.
Yes! You are free to create your own agreement, but many people seek the help of experts for this process.
No lawyer is required, but one may be helpful if you would like them to give legal advice and check over your agreement.
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