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Managing a Utah business requires a lot of time and effort. It also involves a lot of decisions. Simplify the decision-making process when it comes to the internal operations of your limited liability company (LLC) by creating an Operating Agreement. It can offer clarity as to the roles and duties of the members, set up the ownership structure of the company, and outline standard operating procedures. This guide will instruct you on how to draft your Utah Operating Agreement.
An Operating Agreement has many uses, but it mostly outlines the rules and regulations of an LLC’s operations, such as the manager’s responsibilities and members’ capital investments.
You are not legally required to have an Operating Agreement to form and run a Utah LLC. Still, it is recommended that you have one to further protect yourself from personal risk and liability in case of lawsuits against the company.
Having an Operating Agreement for your Utah LLC is not only considered best practice; it also offers credibility to your company. Banks and investors will usually ask to see your LLC’s Operating Agreement before they let you open a business bank account or apply for a loan.
An Operating Agreement also allows you to formalize verbal agreements you might have discussed with the other LLC members (owners). A notable benefit of a Utah Operating Agreement is the legitimacy it creates for your company. It signals professionalism to clients and all parties you do business with.
And even though this contract is between you, your partners, and the company, it also helps shield your business from state interference. Without an Operating Agreement, your business operations and working relationship will fall under the default laws of the state. Since you and other members of the company may not always agree with the general rule, it could be a source of conflict. Be proactive and avoid disagreements by creating an Operating Agreement.
You can customize your Operating Agreement to suit your business’s purpose and model while considering each member’s needs. Below are important points of interest you may include in your Operating Agreement:
Start your Utah Operating Agreement with the same basic information about your company that you provided in the Certificate of Organization (also referred to as the Articles of Organization in many states), which you file with the Utah Department of Commerce Division of Corporations and Commercial Code.
This section will list each member’s ownership stake in the company. You and the other members are free to determine how you want to divide the ownership. Some LLCs give each member an equal percentage, others base ownership of capital contributions to the company, and others still use a different metric. The important thing is that all members agree on how the ownership is split.
Members and managers will have different roles in the company. Your Operating Agreement will provide a clear description of these roles. Write down the requirements to qualify for a manager’s position, who can appoint a manager, what decisions are within the scope of a manager’s responsibility, and what business matters need the members’ approval.
Your company may be member-managed or manager-managed. That’s one of the flexibility features of an LLC. If your business is a jewelry store, and you’re the one who makes and sells the products along with the other members, your LLC is member-managed. Manager-managed LLCs represent a format in which governance of the company is handled by outside appointees or a group of designated internal members. With this structure, passive investors can become a part of your company’s ownership makeup. These investors play only a financial role in your business and do not necessarily take part in daily operational functions.
These details should be specified in your Operating Agreement, including instructions, if members want to change it.
During the course of managing your company, there will be business decisions that members might need to resolve by voting, such as bringing on a new member or buying out a member’s ownership.
In your Operating Agreement, describe each member’s voting power. Do members automatically get one vote each? Or are votes counted according to capital contributions or some other method?
Provide clear explanations of how profits are calculated. If you decide to allocate profits equally among the members, it needs to be in the Operating Agreement. This way, every member is clear about it, and conflicts can be avoided. As with ownership, you and the members can divide the profits however you like, so long as everyone is in agreement as to what percentage each member receives. Don’t forget to specify how often and by what method profits will be distributed.
By default, a single-member LLC is taxed by the IRS as a sole proprietorship, while a multi-member LLC is classified as a partnership. But (if you qualify) you may also elect to be taxed as a C corporation or an S corporation.
In your Operating Agreement, record what tax classification you and the other members have chosen for your company. However, before you file to change your tax structure, you should consult with an accountant to ensure that the change is right for your company.
Your Utah Operating Agreement must include instructions for when a member dies or decides to leave the company. Are members allowed to sell to outside buyers, or are they only allowed to sell to other members? Also, discuss how a member’s stake in the company is handled after they pass away. Will their heir have the same rights and responsibilities as the member? How are ownership interests paid out?
Your Operating Agreement should outline the formal steps for closing the business and winding up affairs and obligations. It’s important to include this in your Operating Agreement because if the company’s outstanding debts and obligations are not paid, you may become personally responsible to the creditors.
Finish off your Operating Agreement with a severability provision. This is a standard boilerplate clause used in contracts. It states that if a portion of the Operating Agreement becomes unenforceable under the law, it does not invalidate the other points. This ensures that a small error in your Operating Agreement doesn’t render the entire document meaningless.
It’s considered best practice to update your Operating Agreement whenever there are changes in your company’s management structure and whenever significant changes are implemented.
Such events may include:
To maintain your LLC’s good standing, you will also need to file a Registration Information Change form with the Secretary of State every time you make changes relating to the purpose of the business, the registered agent’s information, or the addition or removal of members.
Even if you didn’t carry out any changes in your company, you are still encouraged to review your Utah Operating Agreement yearly. This is to ensure that the directives you’ve written are still relevant to your business’s operations.
Are you excited to start your business but don’t have time to worry about administrative tasks? ZenBusiness offers an Operating Agreement template to make the process easier. The template can help you draft the rules and plans that govern your LLC and provide the structure and framework needed to grow your business.
It’s still recommended that you consult a legal professional before signing your Operating Agreement to ensure you cover all essential points related to your business.
You are not legally obligated to create an Operating Agreement in Utah. Still, you are strongly encouraged to have one, as it will provide clear expectations regarding member roles and outline the regulations concerning the management of the business.
ZenBusiness has a operating agreement template to guide you in creating a comprehensive Operating Agreement.
Even as a single-member LLC, an Operating Agreement will benefit you, as it will serve as further proof that your company has a distinct and separate identity from you as the owner.
No, the Operating Agreement is not filed with the Secretary of State, but it’s a legal document and should be kept with your company records.
You can write your own Operating Agreement, but why not make it easier for yourself? Create your Utah Operating Agreement with an available template from ZenBusiness. It provides you with the proper format and prompts you for the essential points that need to be included in the document.
To ensure you cover specific issues that concern your business model and state, it’s highly recommended to consult a lawyer before making your Operating Agreement official.
You don’t need to hire a legal professional to create your Operating Agreement, but it’s recommended that you let a business attorney well-versed in state laws review your Operating Agreement. They can help you include provisions that will protect members from personal liability as a result of lawsuits against the company.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
Written by Team ZenBusiness
ZenBusiness has helped people start, run, and grow over 700,000 dream companies. The editorial team at ZenBusiness has over 20 years of collective small business publishing experience and is composed of business formation experts who are dedicated to empowering and educating entrepreneurs about owning a company.
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