Forming a Michigan LLC takes a lot of planning. Between the Articles of Organization, business licenses, Annual Reports, 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 incorporation 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 Michigan?
No, creating an operating agreement isn’t a prerequisite for starting an LLC in Michigan. That said, it’s extremely beneficial to any business.
Without an operating agreement, your LLC won’t have established procedures and guidelines for member conduct and business activities. Even worse, if your LLC is sued, you could be held personally liable. So, it’s best to draft an agreement as soon as you form your business.
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 Michigan’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 Michigan courts.
Free Michigan LLC Operating Agreement
Faced with the task of writing a detailed and important legal document, your first inclination will probably be to seek out resources on Michigan’s Licensing and Regulatory Affairs website. But since it’s an optional document and it’s highly customized for each business, LARA doesn’t have an official form or directions.
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 Department of Licensing and Regulatory Affairs.
Business Purpose: The type(s) of business your LLC will be doing in Michigan.
Term: How long your LLC in Michigan 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.
When you’re finished, be sure to get the operating agreement approved and signed by each LLC member. Then, keep it with your other business files. It’s an internal document, so submitting it to the Department of Licensing and Regulatory Affairs isn’t necessary. Just keep it somewhere safe, as you’ll need to reference and 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 Michigan 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 Michigan 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 Michigan 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.
Michigan’s LLC Act doesn’t devote a specific section to operating agreements like some states do, but it’s referenced frequently throughout.
Section 450.4102 states that the agreement governs anything “pertaining to the affairs of the limited liability company and the conduct of its business.” This encompasses pretty much everything, and throughout the rest of the LLC Act, you can find various aspects that can be dictated by the operating agreement, from member conduct to income distribution to dissolution.
But this doesn’t mean that the operating agreement is the highest authority – that honor belongs to the state. Your agreement cannot authorize illegal actions by members or the LLC itself, and it can’t exempt the company from LLC maintenance requirements and any court-ordered penalties. For example, if you fail to file your Annual Reports or maintain a valid resident agent, it can’t prevent the state from administratively dissolving your LLC.
Just be careful not to overstep the state’s boundaries and be as detailed as possible in the agreement and you’ll be on your way to sustained success.