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After you file your Certificate of Formation for your limited liability company (LLC), officially registering your business with the state of Washington, don’t forget to create an Operating Agreement.
In this guide, we will outline what an Operating Agreement is, why it is important for your Washington LLC, how to create one that fits your business needs, and what to do if your Operating Agreement needs revisions down the road.
An LLC Operating Agreement is a document establishing a clear set of rules and procedures by which your LLC and associated LLC members (owners) should adhere to avoid disagreements or extended debates over how to proceed on various issues. While you are not legally required to have an Operating Agreement in the state of Washington, it is strongly recommended.
The function and purpose of two different LLCs can vary significantly. Often, the default state laws that apply to businesses won’t completely align with your particular business’s best interests. Creating an Operating Agreement gives you the chance to decide what rules you would like to apply to your business and how it should be run.
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.
Once you create an Operating Agreement, and all members sign it, you should keep this document in a safe place with other important business documents. You are not required to file it with Washington, but you will need to produce it if you encounter a legal dispute related to something included in it.
Operating Agreements can offer some additional legal protection, and the very act of creating one can help you pin down the rules and procedures that you wish to operate your business by. This can streamline your day-to-day operations because you won’t need to figure everything 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. An Operating Agreement creates a legal foundation for how to resolve all of these issues in the best possible way for your business.
More specifically, the reasons to have an Operating Agreement include:
Before sitting down to create an Operating Agreement, it’s a good idea to meet with all members and really discuss what is important to the business, how everyone feels things should be run, what issues might arise in the future, and so on. The more ideas you can generate, the better.
The items listed below are a starting point. They include things that are found in most Operating Agreement templates. But if there are additional rules or regulations you would like to apply to your business, be certain to include those as well. More detail is always better than less.
Some items you may want to include in your Washington Operating Agreement are:
It might seem obvious, but your Operating Agreement should include the name of your business. More specifically, it should include the exact name of the company, including the LLC designator, as you entered it when you filed your Certificate of Formation with the state of Washington.
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.
In your agreement, list the full names and legal addresses of all owners and their percentage interest.
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%, and so on.
You are free to split the ownership how you would like. It doesn’t need to be an equal distribution or tied to capital contributions. The only requirement is that all members agree on it.
There are two main LLC management structures: Member-managed LLCs are managed by the owners (members), but in manager-managed LLCs, the management duties are carried out by one or more managers with or without any stake in ownership. In the latter case, the members may relinquish some of the decision-making powers.
Clearly define your chosen management structure in your Operating Agreement, including the 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.
Not only may different LLCs have different management structures, but they may also define the roles of their managers and members differently. In your Operating Agreement, be sure to spell out the responsibilities, rights, and duties of each individual.
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.
There are many considerations when determining voting rights and responsibilities. Do you want to require all those with voting power to be in attendance for any votes? Do you want members to be responsible for voting on certain issues, but managers responsible for other issues? Will everyone’s vote be equally weighted, or will it vary based on the percentage of ownership or some other metric? Which items can be voted in by a simple majority, and which require a unanimous vote?
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.
When your business turns a profit, you need to detail how those profits will be distributed to the members. Is it equal? Is it proportional to the ownership percentage? Who is responsible for cutting the checks or setting up the direct deposits? When will this happen — at the end of the fiscal year or on some other schedule?
There is no right or wrong way to do this. It is entirely up to you but should be aligned with your business’s best interests and agreed upon by all members. You may also wish to clarify that each member is responsible for paying taxes on any distributions, as LLCs are, by default, pass-through entities (they are not taxed at the business level, but members pay personal income tax on their distributions). If you instead elect to have your LLC taxed as a corporation, you can also specify that in the Operating Agreement.
LLCs are under no obligation to hold regular meetings, but 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.
If you want to hold regular meetings and would like attendance to be mandatory, you should include this in your Operating Agreement. Not only does this make expectations clear to everyone, but if certain members refuse to attend or stop participating, you will have legal grounds to hold them responsible and potentially vote them out if necessary.
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 leaves, they need to be compensated for their share of the ownership. You should establish a method by which you determine the amount of this compensation, 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 be sure to include the details for handling them.
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? Will the ownership percentages be readjusted accordingly?
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 with a member’s share of the 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.
In your section on dissolution, the first thing you should include is how the decision to dissolve the LLC 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. Finally, someone should be designated responsible for making sure the Certificate of Dissolution is filed with the state of Washington.
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, and sometimes the business 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 changes occur.
Second, you should decide how modifications are agreed upon and whether the vote needs to be unanimous. You also need to designate someone responsible for creating the revised document. In some cases, you may need to write up an amendment, but in other cases, it might be more expedient to draft a new agreement.
Many people who start single-member LLCs wonder if they need an Operating Agreement at all. It turns out, Operating Agreements are useful, regardless if only one person is involved or not.
An Operating Agreement allows you to consider the aspects of your business carefully before starting, which has its own value. It also gives you legitimacy in the eyes of financial institutions and third-party vendors and provides another layer of protection between your personal and business assets.
If you are creating a single-member Operating Agreement, you should include wording that specifies that you have 100% ownership, voting rights, and will make all of the business decisions.
A severability provision is a boilerplate clause found in many legal contracts. It states 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.
This protects you if there is an error somewhere in your agreement and creates a legal basis for the remainder of your contract to still be valid.
ZenBusiness can get you started with a customizable Operating Agreement template. You may also wish to seek the advice of a legal professional to make sure everything is in order.
These are just the basic points that your Operating Agreement can include. ZenBusiness has a customizable Operating Agreement template that you can refer to when creating your Washington Operating Agreement. Once you have a basic document created, you can take it to a business attorney for a final once-over. They will be able to offer personalized insights based on your unique business needs.
Businesses change and evolve. Sometimes, laws change, so you want to make sure you remain compliant, and your agreement doesn’t include provisions that are no longer enforceable. You will need to revisit your Operating Agreement regularly and make changes as needed. In your initial agreement, you should have included clear plans for how these changes are to be made in terms of who votes for them and how those votes are counted.
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.
Keep in mind that some changes made to your business may need to be updated with the Secretary of State. In this case, you may need to file an Amended Certificate of Formation and pay a $30 filing fee.
Operating Agreements are not required in Washington, but they are highly recommended and can help protect your business and all members.
You may create an Operating Agreement from scratch or download a template from any number of places online. Once your agreement is created, have all members sign it and keep it in a safe place.
Operating Agreements offer protection for single-member LLCs and can help legitimize your business in the eyes of financial institutions and third-party vendors.
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.
Anyone can write their own Operating Agreement, although you may want to use a template or seek help.
A lawyer is not required, but sometimes it’s a good idea to have a legal professional look over your Operating Agreement for errors before finalizing it.
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