Alabama LLC Operating Agreement: What to Include

What is an LLC Operating Agreement?

An operating agreement gives your business structure and official procedures. It designates ownership, establishes operations, defines member responsibilities, and provides legal protection. Essentially, it lays out everything someone might need to know about your LLC. And it’s an internal document, so there’s no filing or fees involved.

Whether you’re starting a multi-member or single-member LLC, we strongly recommend completing an operating agreement. It’ll benefit and protect you for as long as you’re in business.

Am I Required to Have an Operating Agreement in Alabama?

The Alabama Secretary of State doesn’t require you to have an official operating agreement. However, it’s highly recommended to help keep your business efficient and stable.

Ask yourself this: would I like my LLC to run smoothly? Would I like to have protection in potential legal disputes? Do I want every new member or employee to understand how the business functions?

You probably answered “yes” to at least one of these, so you’ll want to draft an operating agreement.

Benefits of Creating an Operating Agreement

You want what’s best for your business. Months or years in the future, you want it to be a profitable and thriving endeavor. Having an operating agreement in place will set up your LLC for sustained success.

It requires some legwork, but it’s well worth it. Just look at some of the benefits:

• Officially designates how the ownership is split up (the percentage each member/manager owns), so there are no disputes.
• Standardizes office and company operations to improve efficiency
• Outlines the procedures for member additions and resignations, registered agent changes, dissolutions, and more, so there is no confusion.
• Avoids Alabama’s “default rules,” which define baseline procedures for any LLC without an operating agreement and aren’t necessarily the best for your business.
• Grants you greater respect from Alabama courts.

Free Alabama LLC Operating Agreement

Take a look at the Secretary of State’s business forms page and you won’t find an operating agreement – that’s because there’s no official form.

So, you’ll need to create your own, but don’t be intimidated! You don’t need to be an attorney or expert writer to draft an effective agreement. Plus, you can find plenty of free templates online to help you with the structure and legal terminology. While most of these templates are good options, a great starting point is one that you can get free through an affordable LLC service like ZenBusiness or Northwest Registered Agent.

Whether you’re using a template or starting from scratch, here’s a quick and easy guide for what to include:

Owner or Member Information: Names and mailing addresses.

Company Information: Your LLC’s name, registered office, and principal office.

Registered Agent Information: The name of your registered agent, their address, and contact information.

LLC Formation: The date you filed or will file your Certificate of Formation with the Secretary of State.

Business Purpose: The type(s) of business your LLC will be doing in Alabama.

Term: How long your LLC in Alabama will be valid, typically until you file for termination.

Capital Contributions: The amount of money each member has invested in the LLC.

Profits, Losses, and Distributions: How income and debts are allocated among members and methods for distributing funds.

Ownership Percentage: How much of the company each member owns.

Management and Roles: The managerial structure and decision-making processes, naming who is in charge or certain operations.

Compensation: How members/managers are compensated and reimbursed.

Bookkeeping: Accounting procedures and member account policies.

Tax Treatment: Whether your LLC will be taxed as a Sole Proprietorship, Partnership, S-Corporation, or C-Corporation.

Member Additions: The procedure for bringing on new members – how they will be admitted, if they’re entitled to income, any expenses they will owe, their roles, etc.

Member Withdrawal: Procedures for the resignation, expulsion, retirement, or death of an existing member.

Amendment Procedures: How your LLC will approve changes to the operating agreement. Usually, it’s through a majority vote by the members.

Dissolution: What happens when you terminate your LLC. How your members will split up the remaining assets or debts.

You don’t always need to include all of the above. If any don’t apply to your LLC, feel free to leave them out. Still, it’s a good idea to cover as many bases as possible. Even if you’re a single-member LLC, you should consider including as many sections as possible to accommodate future changes. Otherwise, years into the life of your business, you may run into a dispute over something you didn’t include, and you won’t be able to fall back on the operating agreement.

Once you’ve drafted your agreement, make sure it’s approved by all current owners/members. You don’t need to file it with the Secretary of State or Department of Revenue, but you’ll want to keep it safely in your own files for reference.

Making Changes to Your Operating Agreement

For better or worse, your business is going to change. As you begin doing business in Alabama and, hopefully, raking in profits, the LLC will grow and evolve. It will develop different needs and more complicated processes. Keep everything running smoothly but updating your operating agreement as changes occur.

First, all LLC managers/members must approve the change. To seek approval, follow the guidelines you already outlined in your operating agreement for ratifying amendments.

Because it isn’t recorded with the state, modifying your agreement is as simple as making changes to the Word document or PDF you keep in your own files.

For example: your registered agent resigns and, following Alabama law, you appoint a registered agent service to take their place. Simply pull up your electronic file, enter the new agent information, save it, and print a copy. Make sure you keep a draft of the previous document as well so you can track the changes you’ve made, just in case the state ever has any questions.

Hiring an Attorney

Worried that you might miss a critical detail? Uncomfortable with legal minutiae? If you want to ensure your operating agreement provides for all possible outcomes and disputes, you might consider hiring an attorney to review it or write it entirely.

Some attorneys have a flat rate for drafting an operating agreement; others bill by the hour. Either way, you’ll only need their assistance for a limited period of time. Use a site like Avvo to find the right fit for your business. Avvo’s database lets you sort by location, rate, and more – it even shows Alabama lawyers that specialize in LLCs.

Hiring an LLC Formation Service

The LLC formation process, with its forms and fees, might make you want to throw up your hands and surrender. Don’t do that! Instead, consider hiring an online service like ZenBusiness or Northwest Registered Agent.

An online service like we mentioned earlier can quickly take care of all your necessary filings. Plus, they’ll create a customized operating agreement for you!

Given the amount of time you would spend drafting an agreement from scratch, a formation service is worth it. Not only will you receive a meticulously researched and crafted operating agreement, but you’ll also be able to spend more time growing your business, planning your next move, or just relaxing.

References

Even though operating agreements aren’t mandatory for Alabama LLCs, the state has laws for how they can function and what they can and cannot include.

By the state code’s definition, an LLC operating agreement “governs relations among the members as members and between the members and the limited liability company” (Section 10A-5A-1.08). This means that it can dictate member actions, duties, compensation, penalties, and more (with limitations). The same section states that any area not covered by the agreement will be subject to the state’s default operating laws instead. For example, if you don’t lay out how assets and debts will be distributed after your LLC’s dissolution, the state will get to decide.

The operating agreement has power over how your company runs, but it doesn’t have the final word – that belongs to the state. An LLC’s operating is prohibited from superseding state law. It cannot limit the power that state courts or the Secretary of State have over it, nor can it dictate the actions of anyone outside the LLC. So, as an example, it wouldn’t be able to prevent administrative dissolution for failing to file Annual Reports, and it couldn’t create rules for the members of a different LLC.

Stay within the guidelines within the state code, and be sure to make your operating agreement as detailed as possible (so there’s no room for interpretation) and you’ll be good to go!