What is an LLC?
A limited liability company (LLC) is a business structure in the United States that protects its owners from being personally liable for the company's debts or obligations. If you own a business and several assets, you may want to consider forming an LLC. Each state has different laws on creating an LLC. In Virginia, you are not required to have an operating agreement submitted to the Virginia state corporation commission. However, it is still strongly recommended as it provides crucial information that may be helpful in times of disagreement regarding how to operate the LLC. Other key benefits to an operating agreement will be discussed further below.
What is an operating agreement?
An operating agreement is an important document that LLCs utilize because it provides information on the company’s financial and functional decisions. These include the rules, regulations, and provisions in your company. The operating agreement also helps to govern your company's internal operations in a way that aligns with the needs of the various business owners. After the members of the LLC sign this agreement, it is an official contract that binds the LLC members to its terms.
Why do I need an operating agreement?
There are several reasons why an operating agreement can benefit a business, especially one just starting out. It may take additional time to draft it initially but can often prevent a lot of conflicts and save you and LLC members time in the long run. Some of the key benefits of creating an operating agreement are listed below.
- This document can help protect your company’s limited liability status. Operating agreements help reinforce member protection from personal liability for the LLC. Without this additional documentation, the LLC you’ve worked hard to establish can resemble a sole proprietorship.
- The agreement can help clarify any disagreements. Oral agreements are not as solid or binding as written contracts like a completed operating agreement. Misunderstandings can naturally arise, especially with the business's stressors. Having this operating agreement on file with your LLC records is there for your business members to refer to in times of conflict.
- You can set your own rules if you draft your own operating agreement. Without an operating agreement, the default rules your LLC will need to go by are the states. So, each Virginia state's rules for running an LLC will apply to your company. State rules, including Virginia, tend to be too general to rely on and it is strongly recommended you complete an operating agreement to address this.
The general rules that Virginia has about adoption of an operating agreement is for all members to agree upon the document. If the operating agreement or articles of organization do not specify about how an operating agreement should be amended, then all members must agree to the amendment. Virginia also holds that a court of equity may enforce an operating agreement that the court determines to be fair and appropriate in the given circumstances. As you can see, the vague code of Virginia about operating agreements can be troublesome to navigate and unpredictable. It is, therefore, important to have a detailed operating agreement.
What is included in an operating agreement?
Operating agreements tend to be between five to twenty pages long. It outlines the functional and financial decisions for how to run your business and includes the provisions, rules, and regulations. This includes but is not limited to the following:
- Member ownership percents
- The voting rights and responsibilities of members
- Member and manager powers and duties
- How profits and losses are distributed
- Meeting details
- Buy-sell and buyout rules or how to transfer ownership if a business owner were to pass away
- Details on the dissolution process
When should I write my operating agreement?
It’s a good idea to create your operating agreement before filing your Articles of Organization with Virginia’s State Corporation Commission. You can also wait until the formation of your LLC is complete. However, some banks require you to submit an operating agreement before opening a bank account with their financial institution.
Where do I keep my operating agreement?
Operating agreements are kept with the important records of your business. You do not need to file it with the state. Keep in mind that you should keep the operating agreement details confidential.
How do I write an operating agreement?
There are templates readily available online to start drafting your operating agreement. There are templates for both single and multi-member businesses. The general steps for crafting an operating agreement are listed below.
- List the name of your LLC at the top of the agreement.
- Put down the date the business members and involved parties enter this agreement. Also, provide information on how the LLC is being managed. For instance, is it managed by the business members or an appointed manager? If the LLC is a single-member company, write down the name and state where the business is located, in this case, Virginia. If the business is a multi-membered LLC, you will need to list out each name and address of all the members.
- List the LLC name and physical address, including the city and the LLC’s registered agent name and address. Also include all formation details such as the date your LLC was established, the LLC purpose, term, and capital contributions. You will need to specify whether the LLC is single or multi-membered.
- Review your company’s bank accounts and management information while checking the appropriate boxes.
- Every member needs to check the appropriate boxes and review any information related to the member meetings. Each member should also review the information about property ownership, new member admission, dissolution, notices, arbitration, and other information.
- Finally, provide the effective date for the operating agreement and the member signatures.
Once you have completed your operating agreement and the business members agree, each member should receive a copy of the operating agreement.
So, in summary,
The operating agreement is not required in Virginia but is strongly recommended. It can be a crucial document for outlining how your company operates. This can ensure that members are on the same page in times of conflict. In case of a significant event, such as adding or losing a member, reviewing your operating agreement is a great idea. It is also important to note that your operating agreement is a fluid document; you can update it even after it’s written as long as business members agree.
If you require additional assistance creating an operating agreement, it can be helpful to consult a business attorney for assistance.