You’ve always had an entrepreneurial spirit, and you’ve decided to join the 15 million Americans who are self-employed and running their own businesses. You consulted with business professionals and chose to form a Mississippi limited liability company (LLC).
You then filed the Certificate of Formation with the Mississippi Secretary of State. Now, you’re ready to launch your business, except for one thing: You need to create an Operating Agreement. This is an important document that will serve as your company’s road map to guide the day-to-day operations and internal affairs of your business when forming an LLC.
We’re glad you found us, as we have information and resources that can help you with drafting your Mississippi Operating Agreement.
If you are eager to get started on your Mississippi Operating Agreement, below are detailed recommendations that you can follow. Find out why you need an Operating Agreement, what needs to be included, and when you need to update it.
What is a Mississippi LLC Operating Agreement?
An Operating Agreement is a contract between you and the other members of your LLC. Although this isn’t filed with the state, this is a legal document that will outline who makes up your organization and the policies and procedures that will direct your company’s operations.
Here are some points of interest you can address as you prepare to draft your Mississippi Operating Agreement:
- The purpose of your business
- The dissolution date of your business, if applicable
- How you want your business to be taxed
- Who owns and manages the business
- The rules on admission of new members
- What each member will contribute to the business
- How profits will be allocated
- How issues and complications will be settled
Why do I need an LLC Operating Agreement in Mississippi?
An Operating Agreement is not legally required by Mississippi statutes. However, it is a document that every LLC should create because it does more than just add a level of credibility to your company. Most banking institutions also require LLC owners (referred to as “members”) to provide a copy of the agreement when applying to open a bank account.
Whether you have a single-member or multi-member LLC, a written Operating Agreement will be beneficial to you because:
- It helps protect the limited liability status of your company: An Operating Agreement is important if you are a single-member LLC because you have to prove that you and your business are separate from each other. Creating an Operating Agreement will give you an extra layer of protection to ensure that your limited liability status is upheld by the courts.
- It clarifies verbal agreements: If you have several members in your LLC, you’ve probably already discussed how much each member will contribute to the startup costs, what roles you will take on in the management of the business, and how the profits of the company will be divided among yourselves. But since these are important considerations that will have a significant impact on your everyday lives and financial needs, it’s best to write them down and create a binding contract.
- It upholds the agreement under Mississippi law: Like most states, Mississippi has default laws for LLCs. These are rules that govern all Mississippi LLCs. The rules are generally helpful in resolving issues where members have not provided guidelines in their own Operating Agreements. But these particular rules may not be what you had agreed on as members when you started the business. So, to avoid being subject to the default laws, you need to create an Operating Agreement.
What do I include in my Mississippi LLC Operating Agreement?
Depending on the industry you’re in, your plans and goals for your business, and your management style, you will have a very different Operating Agreement from the last person who created one. However, certain relevant points apply to most Operating Agreements.
Below are points of interest and recommendations to help you draft a customized, comprehensive Operating Agreement for your Mississippi LLC.
Some items you may want to include in your Operating Agreement are:
- Company Formation
- Powers and Duties of Members and Managers
- Voting Rights and Responsibilities
- Capital Contributions
- Distribution of Profits
- Succession Planning
- Buyout or Buy-Sell Rules
- Severability Provision
1. Company Formation
This section of your Operating Agreement contains the same information that you put down in the Certificate of Formation.
This may include:
- Your LLC’s legal name
- LLC’s organization date
- Mississippi registered agent
- Purpose of the business
- Names of members
If you are a single-member LLC, you will put in writing that you are the only owner and have a 100% interest in the business.
For multi-member LLCs, there are two common ways that companies calculate units of ownership among their members. One way is to divide the business equally among all members regardless of their initial capital contribution. This means that if you have four members, each gets 25% of the company, whether or not that number represents their contribution.
On the other hand, multi-member LLCs may decide to compute the percentage of ownership according to their capital contributions or involvement in the business operations. For example, let’s say an LLC has three members, and the company needs initial capital of $5,000. One member puts down $2,500, and the other two members contribute $1,250 each. This means one member owns half of the company, and the other two will each own 25%.
You can divide ownership by some other means, as well, so long as all members are in agreement.
3. Powers and Duties of Members and Managers
The management of the business is one area that state default laws may not be compatible with how LLC members want to run their business. This is not surprising because the default laws are generalized and meant to work for every business and every industry. But, of course, businesses owned by unique individuals will also have specific needs and goals.
In this section of your Operating Agreement, you may include items such as:
- Whether your company will be managed by its members or by appointed or hired managers
- The qualification requirements for a manager
- The scope of authority and responsibilities of the management team
- How major business decisions will be made
LLCs can be member-managed or manager-managed. A member-managed LLC is generally adopted by companies with fewer owners. The members are the owners and employees of the company. You would have to specify this in your Operating Agreement and set conditions and limitations for each member’s role.
A manager-managed structure is often used by LLCs with a relatively large number of members, where it’s not practical for everyone to be involved in the everyday operations of the business. If you prefer to be a manager-managed LLC, you should also state this in the Operating Agreement.
4. Voting Rights and Responsibilities
If you are a single-member LLC, you will need to affirm that you are the only decision-maker and representative of your company in the Operating Agreement.
Multi-member LLCs may assign voting rights to each member in proportion to their ownership percentages. Or they may grant members one vote each without regard to their ownership interests. They can also use some other metric.
In your Operating Agreement, discuss the assignment of each member’s ownership interest in the business. And if you are a manager-managed LLC, you may add guidelines on how managers are selected and the nature of decisions they can make for the business without needing approval from the members.
5. Capital Contributions
Before you’ve filed for the Certificate of Formation for your Mississippi LLC, you’ve probably already figured out the startup costs for your business. And if you have co-owners, you’ve most likely already discussed what each member will contribute, whether it’s in the form of cash, property, or services.
This portion of the Operating Agreement is where you put all that in writing. It’s important to document this even if you have bank statements and tangible objects to show that a member contributed what was agreed upon. This is not only for formality’s sake but also because the initial capital contribution is often the basis for each member’s portion of company profits.
6. Distribution of Profits
As a member of the LLC, you are entitled to share in the profits. You should have detailed information in your Operating Agreement of each member’s contribution, ownership percentage, and how profits are distributed.
For example, you can put in writing that members of the LLC will receive profits calculated according to their ownership percentage in the business, and the amount will be deposited to their respective personal accounts at the end of every calendar year.
Some LLCs that allow cash, property, or services as capital contributions may also choose to pay members who contributed cash by giving them a higher percentage of the income until their investments are repaid.
A single-member LLC is generally taxed as a sole proprietorship by the IRS, while a multi-member LLC is taxed as a partnership. However, LLC members may choose to be taxed as a C corporation or an S corporation. In your Operating Agreement, make note of the chosen tax classification for your company.
Sole proprietorships, partnerships, and S corporations are pass-through entities. This means the IRS treats the owners and the company as one. Pass-through entities allow owners to claim profits and losses, credits, and business deductions on their personal tax returns. But, perhaps, the biggest draw for entrepreneurs to elect S corporation status is the option to split business profits into salary and dividend classifications.
Before you file to change the tax classification of your company, it is advisable that you consult with an accountant or a tax professional. And whichever you decide as members, it should be included in your Operating Agreement.
8. Succession Planning
At any time during the life of the business, a member may decide to leave or, in a worst-case scenario, pass away. Since the purpose of your Operating Agreement is to prepare for the future, it should include guidelines for such events.
Points to consider while drafting this section of your Operating Agreement include:
- Can members transfer or sell their ownership to current members only?
- Are members allowed to sell their ownership interest to third parties?
- If members are allowed to sell to third parties, will current members be given the right of first refusal?
- What are the conditions for a membership sale?
Your Operating Agreement must also give provisions if a member dies or becomes incapacitated. Detail how the ownership interest will be distributed, or if members are allowed to transfer ownership to their estate or legal representative.
9. Buyout or Buy-Sell Rules
Your Operating Agreement should discuss what will happen to the business if any of these events should occur:
- A member retires or resigns
- A member declares personal bankruptcy
- A member gets divorced, and their ex-spouse receives an ownership interest in the company
- A member dies or becomes incapacitated
A buyout agreement can be a separate document if you want to add more detailed guidelines. It’s also advisable to consult a business lawyer familiar with your state and industry to ensure all relevant points are covered.
There may come a time when members no longer want to continue with the business. Or maybe the business was formed for a specific purpose, and upon completion of the project, the company is dissolved. For one reason or another, partnerships and businesses come to an end.
To be prepared, your Operating Agreement must include procedures for members to follow should the time come that the business closes. This is to ensure that all obligations are paid, the company accounts are canceled, and you won’t be personally liable for any obligations of an improperly dissolved company.
Your Operating Agreement should include:
- Who has the right to initiate a dissolution
- Who needs to vote to approve the closing of the business
- What the majority vote is to move the motion forward
- What business events could be a reason to dissolve the company
- How the remaining assets (after paying all debts and obligations) of the LLC will be divided
11. Severability Clause
Your Mississippi Operating Agreement should close with a severability clause. This is a standard legal boilerplate usually used in contracts. It states that even if a section of the Operating Agreement becomes unenforceable under state or federal law, it should not invalidate the rest of the agreement.
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However, as businesses have different needs and structure, it’s still recommended that you consult a legal professional before signing your Operating Agreement.
Updating and Revising Your Mississippi LLC Operating Agreement
It is recommended that you revisit your Mississippi Operating Agreement every time there are changes in the management structure of the business, such as if you switched from being member-managed to manager-managed, and when major business events happen, such as an expansion where you welcomed a new member, members contributed additional capital funds in the business, or there was a change in tax classification.
More importantly, to be compliant and maintain your LLC’s good standing, you need to file the Articles of Amendment with the Secretary of State every time you make any changes to the following:
- The name of the company
- The purpose of your business
- Your registered agent’s information including registered office
- The tax classification of your business
- The management structure of your company
- Any information previously provided in the Articles of Organization
Even when you don’t have a major business event, it is still advisable to update your Mississippi Operating Agreement yearly. This is to make sure that the guidelines you’ve written down are still relevant to your business operations. A good rule of thumb is to look at it again when you’re getting ready to submit your annual report.
Mississippi Operating Agreement FAQs
- Is an LLC Operating Agreement required in Mississippi?
No, an Operating Agreement is not legally required in the state of Mississippi. But you are strongly encouraged to draft one to help ensure you have a clearly defined ownership structure and outline for the operating procedures of your business.
- Where do I get an LLC Operating Agreement in Mississippi?
ZenBusiness has an Operating Agreement template for you. The template gives you a standard format, but you still have full control of the written word. However, it’s recommended to consult with a professional to make sure that you cover all relevant points.
- Does a single-member LLC need an Operating Agreement in Mississippi?
Yes, a single-member LLC can still benefit from an Operating Agreement because it’s further evidence that the business and owner are separate entities.
- Do I file an LLC Operating Agreement with Mississippi?
No, you don’t need to file your Operating Agreement with the Secretary of State, but you need to keep it as part of your company records. Also, provide copies to your members.
- Can I write my own LLC Operating Agreement in Mississippi?
Yes, you can. An Operating Agreement works best when customized to your needs and plans for your company. But why not use an existing template? It still allows you to have full control of the written words while giving you specific points and the right format.
- Do I need a lawyer for an LLC Operating Agreement in Mississippi?
No. However, you and your business have specific needs, so it is advisable that you consult with a lawyer who is well-versed with Mississippi’s business laws to ensure that your Operating Agreement covers important points to suit your company.