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When starting a limited liability company (LLC), you need to make sure you dot all of your i’s and cross all of your t’s. The first steps involve choosing a name, appointing a registered agent, and filing the Articles of Organization to register your business officially with the Commonwealth of Virginia.
After the initial paperwork is taken care of, it’s important not to overlook creating an Operating Agreement. In this article, we will discuss what an LLC Operating Agreement is, why you need one, how to create one, and much more.
Operating Agreements are documents that detail 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 (owners) will be subject to the default state laws, which often do not align well with the specifics of each business. Although Operating Agreements are not legally required in Virginia, they are strongly recommended for protecting your business and the rights of all of those involved and avoiding disagreements down the road.
While Operating Agreements may not be legally required, they are still legally binding. Because of this, when creating one, you want to make sure you do so carefully. It can be helpful to use a template to get started and have a legal professional look it over before signing. You do not need to file your Operating Agreement with the state, but you should keep it in a safe place with your other important business documents.
A Virginia LLC Operating Agreement not only provides 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.
There are many details to consider, such as voting rights, ownership percentages, capital contributions, meetings, and membership changes. 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. Take some time to consider what your business’s day-to-day operations will look like and what is important to you and the other members.
To make sure you don’t leave anything out, here are several of the main items to consider including in your Virginia Operating Agreement:
Your Operating Agreement needs to include the name of the company as it appears in the Articles of Organization that you registered with the state. This includes punctuation, spelling, and an LLC designator. This is how you make sure your Operating Agreement is legally binding to your business and is enforceable.
LLCs with more than one member must consider how ownership will be divided. Will everyone have an equal share, or will percentage ownership be based on capital contribution or other metrics?
List the full names and contact information for each member with their ownership percentage. You are free to split up the ownership any way you want. It doesn’t need to be an equal distribution or tied to capital contributions. The total percentage of all members should always equal 100%.
LLCs are typically managed in one of two ways: by the members (member-managed) or by managers (manager-managed). The chosen management structure 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 a manager or managers to run the company; the managers can be certain members, someone from outside the LLC, or both. 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.
Your Operating Agreement should also specify the duties of all members and managers. This includes day-to-day responsibilities associated with the business and longer-term responsibilities and oversights. If members and managers have distinctly different roles, you should make a point to clarify the differences between them, as well.
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 also be included in your Operating Agreement.
It is important to include the details of how voting will work for your business. While some LLCs choose to have all members’ votes count equally, others may weigh votes based on percentage ownership or other factors.
Perhaps there are certain types of decisions that should only be voted on by managers and others that should be left 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.
As your business earns money, you will need a method by which to distribute the profits among members.
Your Operating Agreement should detail how profits are shared, how frequently this distribution happens, and who is responsible for enacting the payments.
Regular meetings are a great way to touch base with everyone and determine if changes need to be made. Often, it’s a good idea to schedule regular meetings among members and managers to keep affairs of the company in order. If you want this to be a requirement, you should certainly include it in your Operating Agreement.
In addition to regular meetings, you may also 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 in place 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 funds or a share of their distributions to pay the leaving member a total amount comparable to the value of their share.
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 it isn’t pleasant to think about, a member may pass away. You should be prepared for such an event by including succession plans in your Operating Agreement.
Something must be done with a deceased member’s 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.
Your business may end someday, so you need a plan for how assets will be divided and who is responsible for the paperwork. Not only that, but you need to spell out how the decision will be made to end the business in the first place. Will a vote be called? Must it be unanimous?
Someone should be designated as responsible for completing the Articles of Cancellation and filing it with the state with the required $25 filing fee.
When a business is dissolved, there may be any combination of assets to attend to. You need a plan for handling this. Will everything be distributed according to ownership percentage? Will equipment and materials be auctioned?
Although your Operating Agreement is legally binding, it isn’t unchangeable. In your initial Operating Agreement, you can establish the method by which it may be changed as your business needs or plans change and evolve.
This might mean that you establish a process by which changes may be voted upon, and then establish what percentage of a vote is required to adopt a modification. You should also designate a member responsible for creating the necessary amendments or revisions when changes are voted in.
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.
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.
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 make sure you don’t forget anything when creating your agreement, including a template that can get you started. It may additionally 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.
Not only should your Operating Agreement have detailed plans for how to make changes to it, but you should plan to revisit your agreement regularly and consider if any amendments need to be made.
You may consider holding an annual meeting to review your Operating Agreement. Sometimes laws change, so you want to make sure you remain compliant and that your agreement doesn’t include provisions that are no longer enforceable.
You should also revisit your Operating Agreement any time you make big changes, such as adding or losing a member, significant additions or changes to capital contributions, or changes to your management model.
When updates are voted on, you can choose to create and sign a document indicating the amendments or revise the original agreement in its entirety and re-sign.
You should also keep in mind that sometimes business changes also need to be documented with the state. If any of the information that also appeared in your Articles of Incorporation has changed, you should file the Articles of Amendment with the state and pay the associated $25 fee.
Virginia does not require Operating Agreements; however, they are strongly recommended, as they provide additional legal protection for your business and all members.
Operating Agreements can be generated from scratch or created by utilizing a template downloaded from any number of websites, such as this one from ZenBusiness.
Operating Agreements also help protect single-member LLCs and can further legitimize those businesses in the eyes of financial institutions.
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 create your own agreement, but many people seek the help of experts for this process.
No lawyer is required, but you may want to have a legal professional look over your document for errors before finalizing it.
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