There are several documents that are vitally important when you create a limited liability company (LLC). Of course, you need to create your articles of organization to be able to form your business entity in the first place, which is a legal requirement in any state.
However, there’s one document that isn’t legally required in most states, but that we still feel is a must for any entrepreneur, and that’s the LLC operating agreement. Your operating agreement outlines several important guidelines for how your business will function.
As your business grows and expands, you may eventually outgrow your operating agreement. At this point, you should probably update this document to better reflect the current status of your business. But how do you go about revising an LLC’s operating agreement?
In this article, we will discuss what the operating agreement is, why you might want to update it, and how you can revise your LLC’s agreement.
What Is an LLC Operating Agreement?
In most states, there is no legal requirement to draft an LLC operating agreement. The only exceptions are California, Delaware, Maine, Missouri, and New York, but even of these five states, only New York actually requires a written document — the rest of them allow you to simply create an operating agreement verbally.
Regardless of where your business is located, we think it’s advisable that every LLC have a written operating agreement. Not only does this force you to sit down and think through some important aspects of business operation, but it also provides a document that you can refer to down the line to prevent disagreements with your co-owners in a multi-member LLC.
Even if you’re operating a single-member LLC, the operating agreement is still a vital part of your business, because it provides proof that your LLC is a separate entity from you as a person. Without an operating agreement, it’s easier for the courts to make a ruling that your LLC is merely an extension of your personality, which could lead to you losing your limited liability protection.
What information do you need in your operating agreement? You should start with a section that explains your LLC’s organization, including when and where your LLC was originally formed, who your owners are, and how the membership rights are distributed among those owners. Next, you should designate whether your business will be managed by its owners, or if you will select a manager to handle the daily operations.
In the next sections, you should explain how your owners will vote on important issues pertaining to your LLC, as well as outline how financial contributions should be made. You’ll also want to describe how distributions will be made to your members, and draw up guidelines for how you can replace an owner if necessary.
Finally, you should explain how your LLC’s dissolution process will work. This step isn’t a fun one by any stretch of the imagination, but it’s a painful reality that not all businesses last perpetually. Trust us when we say that if the day comes when you have to close up shop, it’s highly preferable to have a plan in place instead of making one up on the fly.
When Should You Update Your LLC Operating Agreement?
There are a handful of situations in which you should definitely revise your operating agreement, although based on the nature of your LLC’s business, there may be additional factors. In general though, these are the changes to your business that you’ll want to reflect in an updated operating agreement:
- Your LLC adds a new owner
- An owner leaves your LLC
- You change the way your profits are distributed
- One of your owners makes a significant financial contribution to the LLC
- You change your managerial structure
Keep in mind that there are some other factors that could lead you to revise your operating agreement, like if you change your company’s dissolution process. However, these are uncommon enough circumstances that we won’t go into detail about them. For most businesses, the five bullet points above encompass the vast majority of situations that would lead you to update your LLC’s operating agreement.
How Can I Update My Operating Agreement?
The good news is that it’s incredibly easy to make a revision to your operating agreement. Because this is an internal document that does not need to be filed with the state — even in the states that require you to have one — all you need to do is amend the document in your own business documents.
If you prefer, you can download an operating agreement amendment template, like the one offered by Northwest Registered Agent. Or, you can simply edit your existing document to reflect the changes made to your business. Either way, the important point is that you need to make the changes as soon as possible.
You absolutely do not want to run your business with an outdated operating agreement, as this could put your business in hot water. For example, let’s say one of your owners leaves the company, but you fail to note this change in your operating agreement. That owner could claim that they are still owed their portion of profits, and the courts would almost certainly rule in their favor.
All told, there’s nothing terribly complicated about updating your LLC’s operating agreement. The important thing to keep in mind is that you need to revise your operating agreement as soon as a major change happens at your company. Delaying this process by even a few days could be a huge mistake that isn’t easily undone.
As long as you make sure to update your operating agreement quickly and accurately, you shouldn’t have any problems. We hope this article helped you develop your understanding of how to update an LLC operating agreement!