If you’re on the path to starting a limited liability company (LLC) in Ohio, you’ve probably tackled various paperwork to remain compliant and officially register your business with the state by filing your Articles of Organization.
However, after the registration part is done, it’s important to make sure you create an Operating Agreement. In this article, we explain what an Operating Agreement is, why you need one, how to create one, and much more.
LLCs come in all shapes, sizes, and purposes. They are also a great business structure in terms of flexibility. Because of this, it’s a good idea to create a clear set of rules and procedures by which your LLC and its members (owners) should adhere to avoid disagreements or extended debates over how to proceed on various issues.
An LLC Operating Agreement is a document that establishes all of the rules associated with your business. It is created and agreed upon by members. While it is not required by law to have an Operating Agreement in Ohio, it is strongly recommended to keep the affairs of the company in order.
Operating Agreements are legally binding and offer your business and members a significant degree of protection. Without one, your business will be subject to default state laws, which may or may not align with your business’s best interests since they were written for all LLCs in general.
Operating Agreements can offer some legal protections, and the very act of creating one can help you pin down the rules and procedures by which to operate your business so that you don’t have to figure it out as you go.
Consider how many details are involved in running a business and what can go wrong if they are disagreed upon. There’s ownership, capital contributions, responsibilities, voting, membership changes, and so on.
More specifically, the reasons to have an Operating Agreement include:
Your Operating Agreement is your opportunity to make the rules for your business. You and your members get to decide how ownership will be divided, each member’s responsibilities, your management structure, and so on.
Try to think of every possible scenario you might encounter in the operation of your business and determine how it will be handled. By getting everything in writing, you will have a legally binding reference to guide your business moving forward.
It’s important that your company name entered in the Operating Agreement is identical to how you entered it in your Articles of Organization when you registered your business with Ohio.
This means all spelling and punctuation must be consistent, and the LLC designator (e.g., LLC, L.C., etc.) should match. You don’t want your agreement to end up being unenforceable due to a lack of care with something as simple as entering your business’s correct legal name.
For multi-member LLCs, you need to include the names and contact information of all members and their percentages of ownership.
Some businesses split ownership equally among all members, but some may choose to do it differently to account for differences in capital contributions or time and effort contributed. Just make sure that however you split it up, the total percentage equals 100%.
Management structures of LLCs can vary, but there are two main types: member-managed LLCs, which are managed by the owners, and manager-managed LLCs, in which the management duties are carried out by one or more managers with or without any stake in ownership.
Clearly define the management of the company in your Operating Agreement, including names and roles of all managers and any interest they have in the business. In addition, consider detailing the authority associated with members and managers and their voting rights.
An Ohio LLC Operating Agreement should offer details about the management of the company, specifically whether your company will be member-managed or manager-managed. These two choices represent the two most common managerial structures for LLCs.
A member-managed LLC is one in which members of the company are responsible for most of the daily operations of the company. Implementing this structure indicates that every member will be involved in the vote-worthy decisions that will arise within the business.
A manager-managed LLC relies on a manager to supervise the operations of the company. The manager(s) can be one or more of the members, someone hired from outside the LLC, or a combination of the two.
There are several things to consider when it comes to specifying voting rights, responsibilities, and procedures in your Operating Agreement.
You should make it clear who has voting rights (members only? managers?), whether all votes are equal or some are weighted based on ownership percentage or other metrics, whether certain items are voted on by members only or managers only, and how much of a vote is required for different items to pass (simple majority? 100% in favor?).
You should also consider to what extent voting should be required. Perhaps on some issues, a vote can be held without everyone in attendance, but maybe on other issues, you want all members to be present and actively vote. If so, you should include this in the agreement.
As your business earns money, you will need a method by which to distribute the profits among members. In your Operating Agreement, you may also specify that a certain percentage of profits are funneled back into the business.
As for the remaining profits, you should clarify how they are divided up. Is it based on ownership percentage? Also, how often will this distribution happen? Will members be paid by check or direct deposit? Who is responsible for enacting these 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 the holding of an emergency meeting.
For example, annual meetings are a great way to assess your business, determine if any changes need to be made to your Operating Agreement, and vote on any issues. 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.
It’s not unusual for businesses with multiple members to see turnover or grow larger and take on new members. You should include a detailed procedure for how to handle this and include it in your Operating Agreement.
Since all current members are vested in the company, if one of them leaves, they need to be compensated for their share of the ownership. You should establish a method by which you can determine what this compensation amount should be, 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 the method by which that will happen should be included.
You should also include details as to how a new member might be voted in. Will it require a unanimous vote? How much capital will they need to contribute?
While it isn’t pleasant to think about it, a member may pass away. You should be prepared for such an event by including succession plans in your Operating Agreement.
If a member passes away, something must be done with their share of ownership. You need to decide if you want any rules around who they can leave their interest in the business to when they pass and what rights the successor may have.
After this is decided, all members can update their wills accordingly.
Plans need to be in place for the dissolution of the company. First, you need a clear strategy for how the decision to dissolve the business will be made. For example, many businesses require a unanimous vote from the members.
Then, you need a plan for how any assets or outstanding debts will be distributed among the members. Finally, someone should be designated responsible for making sure the Certificate of Dissolution is filed with the state with the $50 filing fee.
While your Operating Agreement is legally binding, it isn’t unchangeable. In your initial Operating Agreement, you should establish the method by which it may be changed as your business needs or plans change and evolve, like if you need to add additional members.
This might mean that you establish a voting process by which changes may be voted upon and establish what percentage of a vote is required to adopt a modification. You should also designate a member of the company responsible for creating the necessary amendments or revisions when changes are voted in.
Even single-member LLCs need Operating Agreements. Such agreements offer additional legal protection and provide legitimacy to your business in the eyes of potential lenders and investors.
If you are writing an Operating Agreement for a single-member LLC, include wording indicating that you have 100% ownership, voting rights, and will be making all of the business decisions.
Finally, there is a boilerplate clause to include that helps protect the agreement if it contains an error or a clause inconsistent with state laws.
This clause should state 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.
ZenBusiness can help you on your path to starting your business by providing an Operating Agreement template. You may also wish to seek the advice of a legal professional to make sure everything is in order.
You should review your Operating Agreement regularly. For example, consider going over it during an annual meeting and determining if each of the provisions is still a good fit for how you want to run your business.
While updating (or at least considering updating) your Operating Agreement should happen on some sort of regular schedule (such as annually), you may need to revise the agreement other times. Any time there is a change in ownership, a new registered agent, an alteration of the management structure, etc., the agreement should be revised to ensure continued legal coverage.
Luckily, revising and updating your agreement is fairly easy to do. You can create amendments to the agreement by typing them up or revising the original document. All members should sign the new document, and it should be kept in a safe place like before.
Keep in mind that some changes made to your business may need to be updated with the Ohio Secretary of State. If any of the information in the original Articles of Organization changes, Ohio law requires you to file a Certificate of Amendment within 30 days and pay a $50 filing fee.
Ohio does not require Operating Agreements, but it is always in your best interest to have one.
You may generate your own Operating Agreement or download an Operating Agreement template from ZenBusiness to get started.
Single-member LLCs also benefit from having Operating Agreements since they provide extra legal protection and lend legitimacy to the business.
Operating Agreements are not filed with the state. You should keep yours in a safe place with any other important business documentation.
You are free to write your own Operating Agreement in Ohio.
While a lawyer is not needed, you may wish to consult a lawyer or another legal professional in the process of creating your Operating Agreement to make sure it is legally sound.
Lawyers can also help gauge high-risk scenarios that might impact your business, and they can write clauses into your Operating Agreement that pertain directly to litigation relative to your new company.
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