Holding Company Operating Agreement
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 an operating agreement.
An operating agreement is a document written on behalf of the members of an LLC that establishes:
- Ownership of the LLC;
- The rules by which the LLC will be governed;
- The 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. But, even in those cases, they don’t have to be filed with the Secretary of State.
Why Operating Agreements Are Important
Wyoming doesn't require its LLCs to have operating agreements. But, there are still many good reasons for your Wyoming LLC to have one.
For a single-member LLC, an operating agreement provides the LLC with credibility and strengthens the corporate veil that prevents lawsuits filed against the LLC from reaching the owner's personal assets.
For multi-member LLCs, not only does an operating agreement strengthen the corporate veil and add credibility, but it also prevents misunderstandings between the members of the LLC by establishing clear rules and responsibilities, and by specifying how internal disputes will be resolved.
What's more, attorneys, courts, and potential investors may need to see a copy of your operating agreement. This is another of the many reasons why your LLC should have an operating agreement in place, even if it's not required by law.
Does a Holding Company Need a Special Type of Operating Agreement?
A holding company does not need any special type of operating agreement. However, it should include and address terms and issues that are specific to the industry in which the holding company is being used.
For example, if yours is a real estate holding company’s operating agreement may specify that the company's funds may only be used to acquire real estate (not art), and that the managing member must also fulfill the role of property manager as well.
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
- The name of the LLC;
- When the Articles of Organization to form the LLC was filed, and in what state;
- The duration of the LLC;
- The principal office address;
- The business purpose for which the LLC was formed; and
- The name and address of your LLC's registered agent
Article 2: Management & Voting
- Whether the LLC will be member-managed or manager-managed;
- How voting in the LLC will work; and
- What issues will be voted on
An LLC can be managed by its members or by appointed managers. If the LLC is manager-managed, what authority the manager has and how he or she can be removed will also be detailed in this article.
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 majority.
Lastly, this article should specify which actions will need to be voted upon and which can be decided by the manager. This may include issues related to:
- 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
- Who the members of the LLC are
- Each member’s particular ownership interest, and
- Which members made capital contributions to start the LLC.
This article should also specify how additional funding can be raised by the members, for example:
- By issuing membership units to existing members in exchange for capital contributions; and/or
- By issuing additional units to new members
Article 4: Distributions
This article deals with how the LLC's profits and losses will be shared amongst its members. This can include money, physical property, or other business assets.
Distributions (money) may be allocated to members proportionate to each member's share of ownership, or by some other metric. For example, if some members work in the LLC and others don't, those who work may receive an extra distribution.
Similarly, profits and losses may be allocated to the LLC’s members according to their percentage of ownership, or by some other method.
Finally, this article 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;
- How existing members can be removed;
- If and when members can transfer their ownership back to the company; and
- What happens when a member dies.
This article may also cover how members can volunteer to sell, transfer, or assign part or all of their membership interest.
Finally, you may want to cover how a member can withdraw from the company and whether or not they should receive a distribution when they do.
Articles 6: Dissolution (Winding Up)
This article specifies the circumstances upon which the company may (or must) be dissolved and the process for doing so, also referred to as "winding-up" the affairs of the business.
If the company owns assets, this article may also specify how those assets should be distributed after the company has been wound-up.
Why An Operating Agreement is a Living Document
Your holding company's operating agreement should change and evolve as your business grows. This is why it is often thought of as a "living document".
Dynamic 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. But, you must ensure that all of the LLC's members approve the changes according to the voting requirements outlined within the existing operating agreement.
You can also enlist the services of a qualified business law attorney to assist you with drafting your holding company 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.