Forming a Kentucky LLC takes a lot of planning. Between the Articles of Organization, business licenses, privilege 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.
Time-Saving Hack: There are a handful of online LLC creation services that can form an LLC for you and include a free customizable operating agreement. ZenBusiness, though, is the only one that offers a free operating agreement in every package.
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 Kentucky?
Your LLC is not required to maintain an operating agreement in Kentucky. That said, operating agreements allow you to dictate how your business functions, set up member duties and rules, and protect your professional and personal assets, so it’s highly recommended that you create one.
While it might not seem pressing at the time, drafting even a simple operating agreement can save you from a lot of trouble if you run into internal or external disputes about business activities, distributions, taxes, or anything else down the road.
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 Kentucky’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 Kentucky courts.
Free Kentucky LLC Operating Agreement
Faced with the task of writing an operating agreement, your first inclination might be to seek out resources or directions. Unfortunately, the Secretary of State’s website doesn’t provide either, as the agreement is optional and is highly customized for each particular LLC.
But this doesn’t mean that there are no resources out there. You can find a number of quality operating agreement templates online, which are great for providing a framework to build on. While most of these templates are good options, we recommend this one, created by Northwest Registered Agent. It’s an ideal jumping off point to get you started.
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 Secretary of State.
Business Purpose: The type(s) of business your LLC will be doing in Kentucky.
Term: How long your LLC in Kentucky 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? Before you finalize your document, you must get it approved and signed by all LLC members so that everyone is on the same page and content with the way the business will run. Because it’s strictly an internal document, you won’t need to file it with the Secretary of State. Just save it in your own business files, as you’ll likely need to reference and/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 Kentucky 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 Kentucky 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 Kentucky 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.
Kentucky’s Secretary of State website doesn’t provide a lot of information about the operating agreement and, while it doesn’t have a section in the LLC Act, it is referenced.
According to Section 275.015 of the Kentucky Revised Statutes, an operating agreement governs “the conduct of the business and affairs of a limited liability company.” Other sections use the term “or as otherwise provided in an operating agreement,” meaning that for most aspects of business activity, member conduct, income allocation, etc., the agreement has final authority. This is why maintaining an operating agreement lets you direct even the smallest business procedures.
It doesn’t have complete authority, though. State and federal law still have the final word. Your operating agreement cannot authorize any illegal business or member activity, and it doesn’t make your LLC immune from the state’s business maintenance requirements. As an example, if you fail to keep a valid registered agent on file, your operating agreement can’t protect your company for administrative dissolution. While an agreement will provide personal protection in legal disputes, it won’t stop the state from penalizing your LLC.
But if you’re careful about respecting the state’s boundaries, and if you make your operating agreement as detailed as possible, your business will be prepared to run smoothly for years to come.