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Before you get your Oklahoma limited liability company up and running, it’s important not to overlook creating an Operating Agreement. In this article, we will discuss what an Operating Agreement is, why you need one, how to create one, and much more.
An Operating Agreement is a formal document that outlines all agreements between members (the term for the owners of an LLC) about details associated with your LLC. In general, LLCs have a lot of freedom in how they can operate within the law. But this also means that choices must be made for how things should work.
The Operating Agreement basically establishes the ground rules and procedures decided by members so that they are best aligned with your business. Without such an agreement, any time there is a dispute between members or between your LLC and third-party vendors, the ultimate decision as to what will happen is determined by the default state statutes.
Those statutes were written to apply generally to all LLCs and are not likely aligned to your business’s best interests. This is part of why an Operating Agreement is so important. By creating an Operating Agreement, you get to establish what rules apply to your business instead of the state.
While Operating Agreements are not legally required in Oklahoma, it’s always a good idea to have one. It helps you avoid disputes and legal troubles down the road, and it’s convenient to have a clear set of established rules and procedures to guide your business operations.
Operating Agreements not only provide your business and associated members additional legal protection, but it’s a way for you to set your own rules and really examine how you want to run your business.
There are many details to consider, such as voting rights, ownership percentages, capital contributions, meetings, membership changes, and so on. Your Operating Agreement is a chance to make these important decisions and establish them in a way that makes them legally enforceable.
More specifically, the reasons to have an Operating Agreement include:
When creating your Operating Agreement, you want to be as methodical and thorough as possible. To help make sure you don’t leave anything out, here are several of the main items to consider including in your Oklahoma Operating Agreement:
It might seem obvious, but your Operating Agreement should include the name of the company. However, you need to be careful about making sure you use your LLC’s name as entered in your Articles of Organization.
This includes punctuation, spelling, and an LLC designator. This is how you make sure your Operating Agreement is legally binding to your business and enforceable.
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 ownership percentage. The total percentage of all members should equal 100%.
LLCs are typically managed in one of two ways: by the members (member-managed) or appointed managers (manager-managed). Management of the company can affect how responsibilities are assigned and other aspects of your business. As such, you should describe your management structure in your Operating Agreement.
In a manager-managed LLC, the members appoint or hire one or more managers with or without any stake in ownership to manage the company. In a member-managed LLC, the members make all of the decisions regarding the day-to-day business. Be sure to spell out who is in what role and their authorities and voting rights.
Different LLCs may not only have different management structures but also define the roles of their managers and members differently. In your Operating Agreement, be sure to spell out what the responsibilities of each individual are.
Is someone responsible for calling meetings? Are all members required to attend meetings? Who takes care of the paperwork?
Even if some or all members aren’t involved in the day-to-day business operations, they may still need to attend meetings and participate in voting. This should be included in your Operating Agreement, as well.
The details of how voting will work for your business is very important to include. While some LLCs choose to have all members’ votes count equally, others may weigh votes based on 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.
When your business turns a profit, you will need to decide if a percentage of that will be reinvested into the business or distributed among the members. Moreover, you need to detail how that distribution works. Is it equal? Is it proportional to ownership percentage? Also, who is responsible for cutting the checks or setting up direct deposits? And when will this happen — at the end of the fiscal year or on some other schedule?
Regular meetings are a great way to touch base with your LLC members and determine if changes need to be made. Often, it’s a good idea to schedule regular meetings among members and managers. If you want this to be a requirement, you should certainly include it in your Operating Agreement.
Besides regular meetings, you may want to indicate that additional meetings will be held for certain events, such as a member wanting to leave the business.
By stating how and when meetings will be held and attendance requirements in your Operating Agreement, you not only establish expectations but also create a legal basis for voting out noncompliant members who fail to show up or do their part.
You should have a clear plan for how to handle things if an existing member wants to leave the business or if you want to bring on an additional member.
All members have a certain percentage of ownership. For them to walk away, they need to relinquish that ownership to someone else for compensation in return. This is called a buyout. Usually, the remaining members contribute a portion of their funds or a share of their distributions to pay the leaving member a total amount comparable to the value of their share.
You should have a clear way of determining the amount of the buyout and how the remaining members will be expected to participate or contribute.
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?
While not something people like to think about, it’s also a good idea to have a plan should one of the members pass away. This is where succession planning comes in.
You will need to consider what happens, or what you wish to allow to happen, with a member’s share of ownership when they are gone. Can they leave it to a family member or friend? If so, will this friend or family member have the same voting rights as the original member? Should the members be allowed to approve a successor before a member adds them to their will?
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? And then, you should designate who is responsible for completing the Articles of Dissolution and filing it with the state with the required $50 filing fee.
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. Will everything be distributed according to ownership percentage? Will equipment and materials be auctioned?
Regardless of how carefully you prepare your Operating Agreement initially, you will likely need to modify it from time to time. Sometimes, the need arises due to original plans not fitting well with the day-to-day operations, and sometimes, the business simply evolves, and the old rules don’t account for all of the changes.
First, include a plan for how often potential changes may be visited. Perhaps you want to review the Operating Agreement at an annual meeting and vote on changes then. Maybe you want to review the agreement whenever any significant change occurs.
Second, you should decide how modifications are agreed on and whether the vote needs to be unanimous. Lastly, you need to designate someone responsible for creating the revised documents. In some cases, you may need to write an amendment, but in other cases, it might be more expedient to draft an entirely new Operating Agreement.
If you are starting a single-member LLC, you might be wondering how much of this Operating Agreement business really applies to you. It turns out that Operating Agreements are important for single-member LLCs, as well.
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.
Even though you may look over your Operating Agreement and have it examined by a legal professional before signing, there’s always the possibility that something is missed, and a portion of the agreement is unenforceable or inconsistent with the state law.
Because of this possibility, it’s common to add a clause stating that if it turns out that one or more portions of your Operating Agreement are deemed legally invalid, it does not invalidate the rest of the agreement.
ZenBusiness has resources to help you make sure you don’t forget anything when creating your agreement, including a template that can help get you started. It may also be a good idea to seek the advice of a legal professional before you sign your document, just to make sure everything is in order.
It’s a good idea to revisit your Operating Agreement on a regular basis. Things constantly change in the course of doing business, and you want to make sure there aren’t any parts of the agreement that no longer align well with your day-to-day operations. You might want to think about revisiting it when you file your annual certificate with the Oklahoma Secretary of State.
In addition to an annual checkup, your Operating Agreement may need to be revised whenever a significant change occurs — a change in membership, management structure, etc.
Updating your agreement is simple. You can type up amendments or revise the document in its entirety. Once the new documentation is signed by all members, you need to store it in a safe place.
Keeping your Operating Agreement up to date provides your business with continuous legal coverage.
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 Amended Articles of Organization with the state of Oklahoma and pay the associated $50 filing fee.
Operating Agreements are not legally required in the state of Oklahoma, but they are strongly recommended as a way to protect your interests and those of your business.
Operating Agreements may be generated from scratch or written using a template, which can be downloaded online.
Single-member LLCs still benefit from having an Operating Agreement, as it provides additional legal protection and legitimization in the eyes of financial institutions.
Operating Agreements are not filed with the state. Instead, you should keep them in a safe place with other important business documents.
You can certainly write it yourself; however, it is often advisable to consult a legal professional just to make sure you haven’t overlooked anything or made any errors.
No lawyer is required, but one may be helpful if you would like them to check over your agreement.
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