Every business entity needs an "instruction manual" that serves as a guide to how the business will be owned and operated. For a limited liability company (LLC), this instruction manual is called an “Operating Agreement.”
An operating agreement is a document written on behalf of the members of an LLC that establishes:
- Ownership of the LLC;
- Rules governing the LLC; and
- Duties and responsibilities of the LLC's members.
Operating agreements are only mandatory for LLCs in a few states and usually only for multi-member LLCs. Regardless, if an operating agreement is required, it doesn’t have to be filed with the Secretary of State.
Why Operating Agreements Are Important
While Wyoming doesn't require LLCs to have operating agreements, there are still many reasons for your Wyoming LLC to have one. Operating agreements provide single-member LLCs with credibility while strengthening the corporate veil that prevents creditors from reaching the members’ personal assets. For multi-member LLCs, in addition to providing asset protection and credibility, operating agreements can prevent misunderstandings among members because it provides clear rules and responsibilities and specifies how internal disputes are to be resolved.
Does a Holding Company Need a Special Type of Operating Agreement?
Holding companies do not require any special type of operating agreement. However, the operating agreement should include and address terms and issues that are specific to the industry in which the holding company is being used. For example, a real estate holding company’s operating agreement may specify that the holding company’s funds can only be used to acquire real estate (as opposed to long-haul trucks) or that the managing member must also fulfill the role of property manager.
What Needs to Be Included in an Operating Agreement?
There are essentially 6 important sections or articles that your operating agreement should include:
Article 1: Basic Information
- Name of the LLC;
- When and where the Articles of Organization to form the LLC was filed;
- Duration of the LLC;
- Principal office address;
- LLC’s business purpose; and
- Name and address of the LLC's registered agent
Article 2: Management & Voting
Whether the LLC will be member-managed or manager-managed;
- An LLC can be managed by its members or by appointed managers. If the LLC is manager-managed, the authority the manager has and how he or she can be removed will also be detailed in this article.
How voting in the LLC will work; and
- Company voting policy outlines how the members of the LLC will vote on issues that require a group decision. You will need to specify if voting rights will be decided by the number of membership units a member owns or “per capita,” i.e. one vote per member. You will also need to specify if votes need to be unanimous or by majority.
Which issues will be voted on or which ones will be decided by the manager, e.g.,:
- Amendments to the operating agreement;
- Merger or dissolution;
- New members; and
- The purchase or sale of business assets
Article 3: Members Interest And Capital Contributions
- Named LLC members;
- Each member’s particular ownership interest;
- Which members made capital contributions to start the LLC; and
How additional funding can be raised by the members, e.g.,
- By issuing membership units to existing members in exchange for capital contributions; and/or
- By issuing additional units to new members
Article 4: Distributions
Outlines how profits and losses will be shared among its members;
- Profits and losses can include money, physical property, or other business assets
- May be allocated to members according to percentage of ownership
- Should specify that allocations and distributions will still need to account for outstanding debt and taxes owed by the LLC
Article 5: Membership Changes
- How new members can be added and existing members are removed;
- If and when members can transfer their ownership back to the company; and
- What happens when a member dies or withdraws from the company.
Articles 6: Dissolution (Winding Up)
- Specifies the circumstances upon which the company may (or must) be dissolved;
- Process for doing so, also referred to as "winding-up" the affairs of the business;
- If the company owns assets, how those assets should be distributed after the company has been wound-up.
An Operating Agreement is a Living Document
A company's operating agreement should change and evolve as the business grows. Therefore, it is often thought of as a "living document". Amendments can be made to your operating agreement that will allow your holding company to make pivotal changes, rather than being locked into a very inflexible structure, so as long as the operating agreement allows for it.
A qualified business law attorney can assist you with drafting your operating agreement or with fine-tuning your existing operating agreement if it has become too complex or complicated. Call us today to arrange a consultation with an experienced Wyoming business law attorney.