Forming a Hawaii LLC takes a lot of planning. Between the Certificate of Formation, business licenses, franchise taxes, and more, there’s a lot to consider. And paperwork and startup costs aren’t the only necessary tasks.
You’ll also want to set up your LLC to run smoothly and avoid legal troubles after it’s been registered with the state.
That’s where the LLC operating agreement comes in.
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 Hawaii?
No, you’re not. Hawaii Revised Statutes §428-103 states that “members of a limited liability company may enter into an operating agreement to regulate the affairs of the company.”
But maintaining an operating agreement is extremely beneficial for an LLC. It standardizes the company processes, offers legal protection, and generally helps everything run more smoothly, so we strongly recommend drafting one.
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 Hawaii’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 Hawaii courts.
Free Hawaii LLC Operating Agreement
The Department of Commerce and Consumer Affairs forms page offers an array of fillable forms, but not an operating agreement. There are two reasons for its absence: 1. It isn’t a required filing, and 2. Operating agreements vary greatly depending on the LLC.
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 Articles of Organization with the Department of Commerce and Consumer Affairs.
Business Purpose: The type(s) of business your LLC will be doing in Hawaii.
Term: How long your LLC in Hawaii 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.
All finished? Review your draft to make sure you haven’t missed anything (remember that anything not covered in the operating agreement will be subject to the state’s default laws). Then, pass it along to the LLC’s members so they can approve it. The operating agreement is an internal document, so there’s no need to file it with the Department of Commerce and Consumer Affairs. You can keep it with your own files, as you’ll likely need to reference or revise it later.
Making Changes to Your Operating Agreement
For better or worse, your business is going to change. As you begin doing business in Hawaii 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 Hawaii 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 Hawaii 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.
While it’s not a required filing, the state still has guidelines and restrictions on what an operating agreement can and cannot do.
According to the Revised Statutes, the operating agreement has the power to govern “the affairs of the company and conduct of its business,” as well as “relations among the members, managers, and company.” This covers pretty much every aspect of LLC operations. However, as mentioned earlier, anything not defined by the operating agreement will be governed by the state’s default laws instead.
The Revised Statutes also provides restrictions, establishing what an operating agreement cannot do. It says that an agreement cannot:
- “Unreasonably restrict” access to information or records
- Eliminate the “duty of loyalty,” which states that a manager/member cannot base decisions on personal finances or benefits.
- “Unreasonably reduce” the duty of care
- Eliminate the obligation of good faith and fair dealing
- Change the right to expel a member, as specified in Section 428-601
- Change the requirement to wind up the LLC’s business
- Restrict the rights of third parties that aren’t managers or members of the LLC
In short, your operating agreement cannot override established state or federal laws, nor can they authorize illegal activities or dictate the actions of people outside the LLC.
As you write your agreement, be sure not to overstep the state’s boundaries and make the document as detailed as possible (so there’s no room for interpretation), and you’ll be good to go!