An Operating Agreement outlines details regarding who owns the business and how it’s run, covering everything from profit distribution to a potential dissolution. By providing clarity on these points, it prevents conflict and helps protect you, the business owner, legally.
As you prepare to start your Montana business, creating an Operating Agreement should be at the top of your to-do list. This guide gives you an overview of what the document should cover.
What is a Montana LLC Operating Agreement?
An Operating Agreement is essential to the success of any Montana LLC. This legal document details who owns the business, what their responsibilities and rights are in relation to the business, and how the business is run on a day-to-day basis. It provides clarity on functional and financial operations and protects the LLC’s members legally.
When establishing an LLC in Montana, you have to file the Articles of Organization via the ePass Montana portal, providing essential details about your business, including its name, address, registered agent, and management structure. In some states, you also have to create an Operating Agreement at this time. This is not legally mandated in Montana. In fact, you aren’t obligated to create an Operating Agreement for a standard Montana LLC at all.
There is one very important exception — if you create a Series LLC. This is a type of business structure in which several “child” LLCs operate under the umbrella of a “parent” LLC. Montana is one of the few states that allows a Series LLC. According to Montana law (35-8-202), the Articles of Organization must “set forth the Operating Agreement of each series of members in writing” if “the limited liability company has one or more series of members.” While you aren’t obligated to submit your Series LLC Operating Agreement to the state, you should create one.
Even if you are not planning to start a Series LLC in Montana, you should create an Operating Agreement nonetheless. This valuable piece of paperwork provides the clear, detailed, and comprehensive guidance you need to run your business smoothly. Taking the time to draft this essential document now will save you time and stress in the years to come — and make running a business that much easier.
Why do I need an LLC Operating Agreement in Montana?
The Operating Agreement governs the internal affairs of your business. When signed by all of the LLC’s members (owners), the Operating Agreement is considered a legally binding contract. It can thus serve as a valuable point of reference in moments of confusion or contention or even in formal legal disputes.
Although most states don’t require an LLC to submit or even draft an Operating Agreement, it’s advisable to create one anyway. According to the U.S. Small Business Administration (SBA), “It is unwise to operate without an Operating Agreement even though most states do not require a written document.”
Here’s how a Montana LLC Operating Agreement benefits you:
- Tap into the flexibility an LLC structure offers: Establishing an LLC in Montana offers a slew of benefits, from the possibility of pass-through taxation to state tax credits for startups. The LLC business model is advantageous because it isn’t as complex as some other models, like a corporation. The requirements in terms of tax filings and annual reports are simpler, for example. However, to take full advantage of this flexibility, you need an Operating Agreement that provides comprehensive details on how your business is owned, taxed, and run.
- Add legitimacy to your business: An Operating Agreement shows other people that your business is well-organized and operating in an orderly fashion. While your Montana LLC Operating Agreement is technically an internal document, you may still have to present it to others. If you are seeking to expand your business through support from private investors, for example, they will likely ask to see this document.
- Get verbal agreements down in writing: There’s nothing wrong with coming to an agreement with another LLC member verbally. You should still formalize any such agreements in writing, however. This prevents confusion down the line because you can refer back to your Operating Agreement in case of disagreements. If legal disputes arise, a written agreement is also easier to uphold in court than a verbal one.
- Keep the state out of your business: Montana state law recognizes LLC Operating Agreements. Assuming the document doesn’t infringe on any laws, it should be upheld in court. With a detailed Operating Agreement, you can thus “override” certain state laws. Most states automatically divide LLC profits according to ownership percentage, for example. If you don’t want ownership to determine profit distribution, you can define an alternative guideline for dividing profits in your Operating Agreement.
- Protect yourself from personal liability: An Operating Agreement also serves an important legal purpose by further distinguishing between the LLC and its members in the eyes of the courts. The LLC structure alone is supposed to establish that the LLC is a business entity legally apart from the members. But if someone takes you to court to try to “pierce the corporate veil” by claiming that you are indistinguishable from your business in order to go after your personal assets (your house, car, savings, etc.), having an Operating Agreement in place helps further demonstrate to the courts that you and the LLC are indeed separate entities.
Finally, as mentioned, if you establish a Series LLC in Montana, you are required to have an Operating Agreement. In a Series LLC model, each “child” LLC has its own assets and liabilities. The Operating Agreement is essential in defining the liability limitations of the individual series. This offers additional added asset protection for the individual series.
What do I include in my Montana LLC Operating Agreement?
Your Operating Agreement must be tailored to your business. Details like member rights and duties, capital contributions, and profit distribution are not the same for every company. Still, there are some points that every LLC needs to address. This section defines the basic information that should be included in every Operating Agreement.
Here are some items you may include in a Montana Operating Agreement:
- LLC Name
- Management Structure
- Duties of Members and Managers
- Voting Rights and Responsibilities
- Holding Meetings
- Buyout and Buy-Sell Rules
- Succession Planning
- Modifications to the Operating Agreement
- Single-Member LLC Statute
- Severability Provision
1. LLC Name
For the Operating Agreement to be valid, it must state what business entity it applies to. Specify the name of your business, taking care to write it exactly as it appears in the Montana Articles of Organization (the paperwork that formally established your business entity).
Montana has strict laws governing LLC names. For example, the words “Limited Liability Company” or some variation thereof (“Ltd. Liability Company,” “Limited Liability Co.,” “Ltd. Liability Co.,” “L.L.C.,” or “LLC”) must appear at the end of the business name. You also need to include this element when specifying the name in the Operating Agreement.
Every LLC Operating Agreement must detail the company’s ownership (also referred to as membership). Provide the basic information about each member, including their full legal name, contact address, and title. Additionally, the Operating Agreement should indicate how much of the company each member owns.
Usually, these “degrees of ownership” tend to reflect each member’s initial capital investment in the business. If you put in $500, and your friend put in $500, you’d each own 50% of the business. However, if you put in $750, and your friend put in $250, you’d own 75%, while your friend would own 25%.
3. Management Structure
An LLC can be managed by its members or manager (or multiple managers). In a member-managed model, the day-to-day business decisions and operations are handled by the members. In a manager-managed model, the members appoint a manager or managers to handle the daily tasks of running the business.
The Operating Agreement should specify the management structure and also detail how it may be changed.
4. Duties of Members and Managers
Members and managers have responsibilities to the LLC. They must perform certain duties as part of their involvement in the business. For example, managers might run the show from day to day, but members might meet quarterly to review business figures and vote on any proposed operational amendments.
The Montana Operating Agreement should clearly outline who is responsible for what tasks.
5. Voting Rights and Responsibilities
Many important decisions governing an LLC’s future are determined via member voting. Members may vote to decide on the acceptance of a new member, for example. Being able to vote on such topics gives members power over the business. That’s why it’s important to be clear on member voting rights and responsibilities. Determine what points members are permitted to vote on and what it takes to win a vote.
The Operating Agreement should also specify any division in voting power. Voting power is usually (but not necessarily) aligned with membership percentages. For instance, a member owning 60% of the business will have more voting power than a member owning 20%.
An LLC’s profits and losses must be divided among members. This is referred to as distributions. Determine how profits are split before getting business underway and make this clear in the Operating Agreement. Profit distribution can lead to arguments otherwise. You should also specify when profits will be distributed.
7. Holding Meetings
A meeting is an opportunity for members and managers to come together and discuss business updates. While it’s not legally required, it’s smart to include this requirement in your Operating Agreement. Everyone involved will know from the start that they are obligated to attend these meetings.
8. Buyout and Buy-Sell Rules
Your LLC’s membership will likely change over time. New members may arrive, and old members may leave to pursue other opportunities. When it comes to new members, the Operating Agreement should detail what buy-in they must make into the business.
When it comes to departing members, the Operating Agreement should specify what happens to their ownership percentages. For example, do existing members get a priority right to buy these interests?
9. Succession Planning
Succession planning governs what happens when an LLC member retires or passes away. What happens to their stake in the business? The Operating Agreement can stipulate whether they are allowed to leave such interests to family, for example, or if their share needs to transfer to an existing member.
If just one member wants to leave the business to pursue another opportunity, it can still continue to run. However, if all members want to stop operations, the LLC must be dissolved. The Operating Agreement should detail what needs to take place for dissolution to occur. This is a major decision, so it may require a unanimous vote, for example. The Operating Agreement should also describe the steps needed to wind down the business, like filing the Montana Articles of Dissolution.
11. Modifications to the Operating Agreement
An Operating Agreement is a constantly evolving document. You have to revisit it annually to check that it’s still applicable to your business needs. You also have to update it whenever changes are made to who owns or runs your business and how your business is run. While it’s a given that you will change your Operating Agreement, you must include guidelines for how this is done.
In most cases, members are required to vote on any changes to the Operating Agreement. You can define how much of a majority is needed to win a vote. The Operating Agreement should also note that all members need to sign off on any modifications — otherwise, the document may not be legally binding.
12. Single-Member LLC Statue
It might seem like a lot of the points in an Operating Agreement don’t apply if you are a single-member LLC (meaning you’re the only owner). Topics like holding meetings, voting, and membership shares become less relevant when there’s only one person involved.
You still need an Operating Agreement, however — and you need to include a single-member LLC statute in it. This confirms that you are the only owner of the LLC, and the only person entitled to make decisions about the business.
13. Severability Provision
This is a basic legal clause that appears in many contracts. It essentially asserts that if one point in the contract is invalid, it does not invalidate the other points. Include this in your Operating Agreement to ensure that one error doesn’t make the whole document useless.
Partner With ZenBusiness for Professional Assistance
These are just the basic points that your Operating Agreement can include. ZenBusiness has a customizable Operating Agreement template that you can refer to when creating your Montana Operating Agreement. Once you have a basic document created, you can take it to a business attorney for a final once-over. They will be able to offer personalized insights based on your unique business needs.
Updating and Revising Your Montana LLC Operating Agreement
As mentioned, one of the great advantages of LLCs is the flexibility they provide. This is reflected in the Operating Agreement — which can be updated whenever you want and however you want. At the least, revisit your Operating Agreement once per year. All of the members should meet to review the document, point by point, to see if it’s still valid and fits the business’s operational needs.
There are also times when you will have to proactively revise your Operating Agreement because a change has been made to the LLC. Modifications to the business management or membership teams, general structure, and operational guidelines all need to be reflected in the Operating Agreement. Even purely administrative amendments — like a change to the LLC name — must be updated in the paperwork. Otherwise, the Operating Agreement may become invalid.
Just because you’ve decided you want to change the Operating Agreement doesn’t mean the job is done. When a need for amendment arises, don’t delay taking steps to implement them formally. Make sure the paperwork is changed promptly. Until it’s updated, the old document will technically remain valid. If you, for some reason, have the bad luck to end up in a legal dispute at this time, the courts will defer to the existing document.
Don’t stress, though — updating your Montana LLC Operating Agreement isn’t complicated. Here’s what it takes:
- Read your existing Operating Agreement. It should provide details regarding what it takes to modify the document, such as a majority vote among members.
- Make the necessary changes to the Operating Agreement in writing.
- Have all members sign off on the amended Operating Agreement.
Finally, keep in mind that some of the changes made in your Operating Agreement must be reflected in the Articles of Organization you have filed with the Montana Secretary of State. Details like the LLC name or membership, which you initially provided when establishing your LLC, must be accurate in the state registry, as well. To update this information, you can file the Articles of Amendment and pay a $15 filing fee. To access this form, go to the Montana Secretary of State website and click “Renew, amend, or cancel a business.” Search for your entity name and select from the available options on the dropdown menu.
Montana Operating Agreement FAQs
- Is an LLC Operating Agreement required in Montana?
Montana does not require a standard LLC to submit an Operating Agreement or even create one. However, Montana does require that Series LLCs create an Operating Agreement. In a Series LLC, multiple “child” LLCs operate under a larger “parent” LLC. Each child LLC has its own assets and liabilities. The Operating Agreement is integral to defining the liability limitations and safeguarding the asset protection of each individual series.
Even if you are not establishing a Series LLC, you should create an Operating Agreement. This legal document offers valuable clarity on how your business is run and can thus prevent confusion and disputes. It also helps to protect LLC members from personal liability in case the business is sued.
- Where do I get an LLC Operating Agreement in Montana?
ZenBusiness has a practical template that can support you as you draft your Operating Agreement. Ultimately, however, every business is unique, and you should have an attorney review the final Operating Agreement to ensure you haven’t missed any points relevant to your business.
- Does a single-member LLC need an Operating Agreement in Montana?
Yes. An Operating Agreement doesn’t just specify who runs an LLC and how the LLC will be run — issues that become more complex when multiple members are involved. An Operating Agreement also helps protect your personal liability. If your business gets into legal trouble, this document will help to safeguard your personal finances.
- Do I file an LLC Operating Agreement with Montana?
The state of Montana does not require standard LLCs to file an Operating Agreement with the state. You will not be legally penalized for failing to create an Operating Agreement. However, foregoing an Operating Agreement can hurt you in other ways, for example, by allowing state law (instead of the Operating Agreement) to dictate your LLC’s governance.
The situation is slightly different for a Series LLC. This unique business model is more complex, as it brings together multiple independent LLCs (each with their own assets and liabilities) under one larger LLC. Because of this added complexity, Montana does require that Series LLCs draft an Operating Agreement. You don’t have to submit it to the state, but you do need to have the document on hand. Keep it with your other essential business documents.
- Can I write my own LLC Operating Agreement in Montana?
Yes. Premade templates can help you get started on the process, providing guidance on the basic points you need to include. That said, you should enlist the help of a lawyer to finalize the document. They will have the local knowledge and experience needed to make sure your Operating Agreement is sufficiently comprehensive, appropriately detailed, and legally valid.
It’s especially important to have the help of a law firm when it comes to Series LLCs. This is a less common business model — in fact, it’s permitted in only a handful of states. The rules and regulations surrounding Series LLCs in Montana are more complex than those surrounding a standard LLC. Additionally, Montana law requires a Series LLC to have an Operating Agreement (although you aren’t required to submit it to the state), making it even more important to have a lawyer’s signoff on the document.
- Do I need a lawyer for an LLC Operating Agreement in Montana?
While you are not legally required to have a lawyer review your Montana LLC Operating Agreement, it’s advisable. An attorney with knowledge of the state’s specific rules and regulations can ensure you haven’t missed any relevant details. They can also add more complex provisions that you won’t find in ready-made templates, such as guidance regarding operational integrity when a member is subject to litigation.
Finally, if you are establishing a Series LLC, which is far more complex, it’s imperative that a legal professional review the document and ensure it’s in line with Montana law.