Our Operating Agreement Template is included in our Pro and Premium plans. It’s also available for $125 with our starter plan.
After the registration part is done, don’t overlook the importance of 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 formal document outlining all agreements between LLC members (owners). This includes how your business will be run, who is responsible for what, how profits are shared, how changes can be made, and much more.
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.
Although Operating Agreements are not legally required in West Virginia, they are highly recommended. In the absence of an Operating Agreement, any time that 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 default state statutes. Those statutes were written to apply generally to all LLCs and are not likely aligned to your business’s best interests.
An Operating Agreement can help you avoid disputes and legal troubles down the road. It is also convenient to have a clear set of established rules and procedures to guide your business operations. This agreement is legally binding and, once created, should be kept in a safe place with other important business documents.
Creating an Operating Agreement can pin down the rules and procedures that you wish to operate your business by, so you don’t have to figure it out as you go. Not only that, but it provides additional legal protection for your business and all members involved.
Many details are involved in running a business, and a lot can go wrong if disagreements arise. There’s ownership, capital contributions, responsibilities, voting, membership changes, and so on. An Operating Agreement creates a legal foundation for resolving all of these issues in the best possible way for your business.
More specifically, the reasons to have an Operating Agreement include:
When creating an Operating Agreement, you and your fellow members decide how ownership will be divided, what the responsibilities are for each member, what your management structure will be, and more.
Try to think of every possible scenario you might encounter in the operation of your business and determine how it will be handled. By getting everything in writing, you will have a legally binding reference to guide your business moving forward.
To help make sure you don’t leave anything out, here are several of the main items to consider including in your West Virginia Operating Agreement:
Your Operating Agreement should contain your business name so that it’s clear what business the rules apply to. However, the name you put in the Operating Agreement needs to be identical to the one you entered in your Articles of Organization when you registered your business with West Virginia.
This means all spelling and punctuation must be consistent, and the LLC designator will need to match, as well. You don’t want your agreement to end up being unenforceable due to a lack of care with something as simple as entering your business’s correct legal name.
For multi-member LLCs, you need to include the names and contact information of all members/owners and their percentage of ownership.
Some businesses split ownership equally among all members, but some may choose to do it differently to account for differences in capital contributions or time and effort contributed. Just make sure that however you split it up, the total percentage equals 100%, and all members agree.
LLCs may be managed by their owners/members (these are referred to as member-managed LLCs) or by one or more managers with or without any stake in ownership (manager-managed LLCs).
Make a deliberate choice about which ownership structure makes sense for you and spell this out in the Operating Agreement. You should also include mention of what rights and responsibilities that both members and managers have.
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.
When it comes to specifying voting rights, you need to consider associated responsibilities and procedures in your Operating Agreement.
You should make it clear who has voting rights. Members only? What about managers? You’ll also need to determine whether all votes are equal, or if some are weighted based on ownership percentage or other metrics. Can members or managers be the only ones to vote on certain items? How much of a vote is required for different items to pass?
You should also consider to what extent voting will be required. Perhaps on some issues, a vote can be held without everyone in attendance, but maybe on other issues, you want all members to be present and actively vote. If so, you should also include this in the agreement.
Businesses need to divide profits among members somehow. Will everyone share in the profits equally, or will it vary based on the percentage of ownership or capital contributions?
You should also 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?
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.
Regular meetings are a great way to assess your business, determine if any changes need to be made to your Operating Agreement, and vote on any issues. If your company plans on a big change or wants to bring on a new member, that might also be a good time for a meeting.
Whatever you want your meeting schedule or policy to be, it’s a good idea to include it in the Operating Agreement. That way, you have it on paper as a guideline and can refer to it if some members fail to show up (for example, is attendance mandatory?).
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 and do their part.
Any business with multiple members may see turnover and new members from time to time. Sometimes, members want out and would like to be free of the business for whatever reason. Your Operating Agreement should clarify the process for this. How will a buyout price be determined? How will it be paid?
Bringing in new members is another consideration. Will you require a unanimous vote, for example? And will a new member be required to contribute to capital? How much? How will the ownership percentages be readjusted accordingly?
Sometimes, a member passes away. This is where succession planning comes in. Will their shares be distributed among the remaining members? Can it instead be left to a family member or friend? What will the rights of this family member or friend be?
Once this is spelled out in the Operating Agreement, all members can update their wills to align with the decision.
If or when the time comes to close up shop, you should plan how this will be handled. Closing a business is rarely as easy as selling the shop and moving on. There are assets to be distributed, paperwork to be finished, and so on.
You should have a clear procedure for deciding to dissolve. Does it require a unanimous vote? Should anyone who does not want to dissolve the business be given the option to buy out other members? How is this decision made and agreed upon?
When dissolving a business, there is also paperwork to complete. In West Virginia, you must file the Articles of Termination and pay a $25 processing fee.
Setting up your initial Operating Agreement requires careful planning and a lot of prediction of what issues you might encounter down the line. However, as you start your business, and your business evolves, new issues will emerge, and your needs may change.
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.
Even single-member LLCs need Operating Agreements. Such agreements offer additional legal protection and provide legitimacy to your business in the eyes of potential lenders and investors.
If you are writing an Operating Agreement for a single-member LLC, include wording indicating that you have 100% ownership, voting rights, and will make all of the business decisions.
A severability provision is a boilerplate clause that helps protect the Operating Agreement if it contains an error or a clause that is inconsistent with state laws.
This clause 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.
ZenBusiness can help you on your path to starting your business by providing an Operating Agreement template that you can customize. You may also wish to seek the advice of a legal professional to make sure everything is in order.
It’s a good idea to revisit your Operating Agreement regularly, such as annually. 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.
In addition to an annual checkup, your Operating Agreement may need to be revised whenever a significant change occurs — such as a change in membership or management structure.
Updating your agreement is simple. You can type up amendments or revise the document in its entirety. Once all members sign the new documentation, you will 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 the Articles of Amendment with West Virginia and pay the associated $25 filing fee.
Operating Agreements are not required in West Virginia, but having one helps protect your business and its members.
You can create an Operating Agreement from scratch or with the help of a template, such as this one provided by ZenBusiness.
Single-member LLCs also benefit from the added legal protection of Operating Agreements. Not only that, but an Operating Agreement can legitimize your business in the eyes of financial institutions.
You do not need to file your Operating Agreement with the state. Just keep it 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.
You do not need a lawyer; however, you might want to have a legal professional check your Operating Agreement for mistakes and completeness before finalizing it.
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