Forming a Maryland 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 Maryland?
No, the Maryland Secretary of State doesn’t mandate the use of operating agreements. That said, considering all the benefits they provide for LLCs, it’s strongly recommended that you have one.
An operating agreement will provide protection for your personal and financial assets and establish a standardized set of procedures to help your company run smoothly. If you don’t want to run into legal or financial trouble down the road, you should maintain 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, resident agent changes, dissolutions, and more, so there is no confusion.
- Avoids Maryland’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 Maryland courts.
Free Maryland LLC Operating Agreement
Alright, so you’ve decided to write an operating agreement. Because it’s an important legal document, your first move might be to seek out resources. Unfortunately, there aren’t any available on the Secretary of State website, but that doesn’t mean you’re completely on your own.
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.
Resident Agent Information: The name of your resident 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 Maryland.
Term: How long your LLC in Maryland 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? Once you’ve reviewed the document to make sure you didn’t forget anything, you’ll need to get it approved and signed by each LLC member. When you’re done with that, file it away with your other business documents. The operating agreement is an internal document, so you don’t need to send it to the Secretary of State’s office.
Making Changes to Your Operating Agreement
For better or worse, your business is going to change. As you begin doing business in Maryland 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 resident agent resigns and, following Maryland law, you appoint a resident 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 Maryland 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.
Despite it being a an optional document, the state lays out pretty specific guidelines for what an operating agreement can and cannot do.
As outlined in the Maryland Statutes §4A–402, an operating agreement regulates a majority of an LLC’s aspects, including:
- Business affairs, activities, and conduct
- How assets are distributed among members
- Member rights to assign their membership interests
- Procedures for admitting new members
- Methods for amending the agreement
- The rights of people who are not parties to the operating agreement or LLC members
So, operating agreements have authority over most of an LLC’s aspects, but they aren’t all-powerful. They cannot allow actions that are illegal and they cannot exempt an LLC from business maintenance requirements and/or penalties. For example, if you fail to keep a resident agent on file or miss an Annual Report, your agreement cannot prevent the state from administratively dissolving your LLC. Additionally, anything that isn’t covered in your LLC will be subject to the state’s default laws.
This might seem like a lot of guidelines to follow, but as long as you stay within the state’s boundaries and make your operating agreement as detailed as possible, you’ll be in good shape!