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There are many details to keep track of and forms to fill out as you start your Rhode Island limited liability company (LLC). The process begins with selecting a business name, deciding who will be part of your company, and officially registering your small business with the state by filing the Articles of Organization.
Once the registration process is complete, the next step of importance is creating an Operating Agreement. In this article, we explain what an Operating Agreement is, why you need one, how to create one, and much more.
An Operating Agreement is a legal document you create during the initial stages of the LLC formation process that details how your business will be run, who is responsible for what, how rules are set, and so on. It allows you to create the rules and procedures for your business. Without an Operating Agreement, any problems or disagreements among LLC members will be subject to the default rules of the state, which often do not align well with the specifics of each business.
While an Operating Agreement is not explicitly required in the state of Rhode Island, it is mentioned and defined in the Rhode Island Limited Liability Company Act. Having one is always a good idea, as it offers protection for your business and allows you to avoid disagreements down the road.
Operating Agreements are legally binding and offer your business and its members a significant degree of protection. This agreement is often created from a template or with the assistance of an experienced professional. You don’t need to file your Operating Agreement with the state, but you should keep it in a safe place with your other important business documents.
Not only does an Operating Agreement provide your business and associated members additional legal protection, but it also allows you to set your own rules and really examine how you want to run your business.
Consider how many details are involved in running a business and what can go wrong if they are disagreed on. There’s ownership, capital contributions, responsibilities, voting, membership changes, and so on.
More specifically, the reasons to have an Operating Agreement include:
The great thing about an Operating Agreement is that it allows you to set the rules and regulations for your business (within reason and in alignment with state laws). In this section, we provide many common items to include in an Operating Agreement, but depending on your business needs, you may need more.
Items to include in your Rhode Island Operating Agreement are:
Including the name of your LLC in the Operating Agreement isn’t just a practical matter of making it clear which business it applies to, but having the exact legal name is what makes the items within the agreement legally enforceable. Your Operating Agreement should include the exact name of the company, including the LLC designator, as you entered it when you filed your Articles of Organization with the state of Rhode Island.
In your agreement, list the full names and legal addresses of all business owners and their percentage interest. You are free to split the ownership however you like. It doesn’t need to be an equal distribution or tied to capital contributions. The only requirement is that all members agree to it.
For example, you may split ownership equally among four members, each owning 25% (the total should always equal 100%), or you may choose to attribute ownership based on capital contribution. If one member contributes 40% of the capital (startup funds), they may own 40% of the company. If the others each contribute 20%, they own 20% each, and so on.
There are two main LLC management structures: Member-managed LLCs are managed by the owners, and manager-managed LLCs are managed by nonmembers. In the latter case, the members relinquish some of the decision-making powers.
Make a deliberate choice as to which ownership structure makes sense for you and spell out the management of the company in the Operating Agreement. You should also include what sort of rights and responsibilities members and managers have.
The 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.
Your Operating Agreement should name the members and managers and indicate what is expected of each and their voting rights and oversight.
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?).
Try to imagine all possible voting scenarios and make sure you spell out the details for each. This will simplify things for you as issues that need to be voted on come up.
Businesses may see any combination of profits and losses from year to year, and these need to be divided among members. Your Operating Agreement should include how these distributions will occur and when. Will it happen monthly? At the end of the fiscal year? Will members receive checks or direct deposit? Who will be responsible for making these distributions? What happens when there are losses? Will members need to contribute more capital?
While LLCs are under no obligation to hold regular meetings, it is often a good idea to do so. Annual meetings are common and are a great way to assess the year’s progress, vote on new issues, and make plans going forward.
In your Operating Agreement, identify when and how often you will hold meetings and who is required to attend. By stating required attendance in this agreement, you will have grounds to vote out any members who stop showing up, so it is always a good idea to include as many details as possible.
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. How will a buyout price be determined? How will it be paid?
Bringing in new members is another consideration. Must new members be voted on? Unanimously approved? Will new members be required to make a certain capital contribution?
It’s also a good idea to have a plan should one of the members pass away. Do you want to allow them to leave their interest in the company to a friend or family member? If so, what sort of voting rights would this new member have? Do you want to place limitations on to whom they can leave their interest in the business?
Once this is spelled out in the Operating Agreement, all members can update their wills to align with whatever is decided.
In your section on dissolution, the first thing you should include is how the decision to dissolve may be made. Does it require a unanimous vote? A simple majority? If there is disagreement about dissolving, can the members who wish to stay buy out those who wish to leave?
You should include a clear strategy for how any assets or outstanding debts will be distributed among the members. If you have employees, you should include steps compliant with Rhode Island Employment and Labor Laws. Finally, someone should be designated responsible for making sure the Articles of Dissolution is filed with the state of Rhode Island with the $50 filing fee.
Regardless of how carefully you prepare your Operating Agreement, 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, or the business evolves, and the old rules don’t account for all of the changes.
As such, you should include information in your Operating Agreement outlining the procedure by which the agreement can be modified. This includes how changes will be voted on, who can vote on these changes, what percentage of the vote is required for approval, and who is responsible for tending to the paperwork.
If you are starting a single-member LLC, you may wonder how much of this Operating Agreement business really applies to you. It turns out that Operating Agreements are important for single-member LLCs, too. In part, this is because they can help keep your personal and business assets separate and make it easier for you to obtain business funding from different sources.
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 authority to make all decisions on behalf of the business.
A severability provision is a boilerplate clause found in many legal contracts. It states that if any part of the agreement is 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.
Because your business and the local laws may change and evolve, you may need to update your Operating Agreement from time to time to stay compliant. In your initial agreement, you should have included clear plans for how these changes are to be made regarding who votes for them and how those votes are counted.
Regarding when to look at it, you should revisit your Operating Agreement at least once a calendar year when reviewing other things that might need updating, like your registered agent or registered office address.
You may wish to revise the document in its entirety or add amendments as separate documents. Make sure all members sign and store this documentation in a safe place.
Remember that some changes made to your business may need to be updated with the Rhode Island Secretary of State. In this case, you may need to file the Articles of Amendment and pay a $50 filing fee, although some changes can be made when you file your annual report.
While an Operating Agreement is not legally required in Rhode Island, it is strongly recommended to provide additional legal protection to your business and all associated members.
You can create your own Operating Agreement from scratch or download a template.
Just as multi-member LLCs are not required to have an Operating Agreement in Rhode Island, neither are single-member LLCs. Many people think that since a single member can make all of the decisions, no agreement is required. However, creating an Operating Agreement is still recommended, as it provides additional legal protection and paves the way for working with third parties.
Your Operating Agreement does not need to be filed with the state but should be kept in a safe place with your other important business documents.
You are free to write your own Operating Agreement, although many people seek assistance at some point to make sure their agreement is legally sound.
No lawyers are needed; however, it can be helpful to consult a lawyer during the process to ensure there are no legal flaws in your agreement.
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