What Is An LLC Operating Agreement?
An Operating Agreement is an internal document that serves as an owner’s manual for an LLC. It provides the necessary information and instructions so that your business can function properly. The document identifies its owners, called members, and clarifies the internal processes involved in the LLC’s daily operations.
Does Alaska require all LLCs to have an Operating Agreement?
Despite its importance, the state of Alaska does not require LLCs to have an Operating Agreement in order to register with the Secretary of State. However, the state encourages LLCs to create and enforce Operating Agreements, as read in the Alaska Revised Limited Liability Company Act.
What Are The Advantages Of An Operating Agreement In Alaska?
An Operating Agreement will provide your LLC with many benefits, such as the following:
Your Operating Agreement outlines your LLC’s purposes and provides guidelines and instructions for attaining its goals. This helps the members and any company manager to focus on tasks. With an Operating Agreement in place, you won’t have to guess what your priorities are and wonder what you need to do to achieve your goals.
Better control of your business
Your LLC is governed by Alaska’s state laws by default. You can override this by creating an Operating Agreement and including provisions tailored to suit your company’s needs. While running your business according to the state’s default laws won’t prove disadvantageous, it’s easier to operate your LLC using your personalized rules.
Reinforced limited liability protections
Your Operating Agreement helps strengthen the limited liability status your LLC gives to you and your co-member(s). It does this by separating all members from the company, thus limiting the members’ liabilities to the business’s obligations. Single-member LLCs benefit the most from the document in this aspect.
Once all the members of your LLC sign your Operating Agreement, they will have to abide by the rules specified in it. The document becomes binding and can be used to legally pursue those who intentionally violate it. This results in increased accountability among members, which also results in better performance.
Reduced risk of managerial misunderstandings
The instructions and guidelines included in your Operating Agreement are meant to remove all confusion regarding your business. They are also meant to set boundaries and limits on what people inside your LLC can do. The document helps avoid potential misunderstandings, which could cause conflicts to arise.
Helps open bank accounts
Unlike the Articles of Incorporation, your Operating Agreement will contain the names and addresses of all the members of your LLC. This allows the document to serve as proof of ownership. Because of this, your Operating Agreement can be used to open bank accounts for your business since most of them require applicants to present proof of ownership.
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What Are The Limitations Of An Operating Agreement In Alaska?
While an Operating Agreement provides your LLC with many benefits, it does have some limitations that can prevent you from doing certain things. Here’s a quick look:
It’s not easy to make
A comprehensive Operating Agreement that covers all the aspects of your business and provides instructions for any foreseeable scenario your LLC might face is difficult to create. You will need to do a lot of research, look into many things surrounding businesses in your industry, and spend a lot of time and effort drafting your Operating Agreement. And if the task becomes too challenging, you might even need to spend funds to hire lawyers who can create one for you.
The state does not require it
Second, since the state of Alaska does not require Operating Agreements, you could be misled into thinking that it is not important. If you are led to believe that, you just might end up ignoring the document. This will result in running your business without the structural support and benefits that only an Operating Agreement can provide.
It cannot be used to counter Alaska’s laws
Lastly, while an Operating Agreement can be customized to create provisions to suit your LLC’s unique needs, it cannot be used to counter or violate Alaska’s existing laws. Every provision you include in the document must not be inconsistent with the state’s regulations, particularly those mentioned in the Alaska Revised Limited Liability Company Act. Your business has to abide by the state’s laws.
What Should You Include In An Alaska LLC Operating Agreement?
Your Operating Agreement has to cover all the aspects of your business. This means it must include all the information necessary for your LLC to function properly always. It must include information that can identify your LLC and its members, outline the company’s goals, and provide instructions for every internal process involved in the business. We’ll discuss more about all these below.
If creating an Operating Agreement becomes too challenging or time-consuming, we suggest hiring a lawyer to create your draft for you.
How To Form An Operating Agreement
Before you start creating your first draft, read the Alaska Revised Limited Liability Company Act. Study everything indicated in it because you can use these for the provisions you will include in your Operating Agreement.
Next, do some research on the best practices for your industry in Alaska, as well as the issues commonly faced by businesses in the state. This will help you get a bigger picture as to what you will need to include in your LLC’s Operating Agreement.
If you run a multi-member LLC, do these things with all of your co-members so you can work on your Operating Agreement together.
When you’re ready, create your first draft by following our tips below. You can then get a lawyer to review your draft for errors or loopholes.
Information about your LLC
Start by providing information used to identify your LLC and the person the state will send correspondence to. Specify the name and registered address of your LLC and the name and address of your registered agent. This section serves as proof that your company uses this Operating Agreement.
Your LLC’s purposes
After that, specify the purposes for your LLC’s formation in Alaska. The statements you provide here serve as your company’s mission and vision and will give direction to your business. This part will remind all members of what the company was made for.
Details about your LLC’s membership
Next, provide information about the members of your LLC. Indicate their names and addresses, and specify their respective capital contributions and interest percentages. This section will serve as your proof of ownership. It will also give everyone an idea of what they should expect as revenue from the business.
Guidelines for membership concerns
Provide guidelines for concerns related to your LLC’s membership. This should include instructions for adding new members, transferring existing membership interests, and withdrawing one’s membership from the LLC. Specify the consequences of membership withdrawal as well, so members know what to expect.
After that, indicate how your LLC will be managed. There are two types of management structures: Member-managed and manager-managed.
In member-managed LLCs, you and the rest of the LLC’s owners are the ones managing and making routine decisions for the business. They personally oversee operations and have no need to hire managers for the job.
In manager-managed LLCs, you entrust the management of daily operations to someone appointed for the task. These managers are given authority over decisions affecting the daily routine. Major decisions are still left to the members.
Member roles and responsibilities
Next, provide a description of the roles and responsibilities given to the members and/or managers of your LLC. Be as detailed as possible so that any confusion related to the matter can be removed. This section sets expectations and limits the authority given to members/managers according to their roles.
Instructions for the distribution of profits and losses
Provide guidelines for the accurate distribution of profits and losses among the members of your LLC. While these are usually distributed according to interests, you can tweak this as long as all members approve the changes. Be as detailed as possible so that any potential conflict related to profit and loss sharing may be prevented.
Meetings and voting procedures
Your LLC’s members will have to meet from time to time for various reasons, including discussing updates about the business, talking about proposed changes, and so on. This means your Operating Agreement has to include guidelines for the scheduling and conducting of meetings. It must also provide instructions for voting since the members of your LLC will be able to approve and disapprove changes and existing practices via votes.
Details about record keeping and financial reporting
Next, provide a detailed description of your LLC’s accounting system. Describe how your company monitors and records financial transactions and makes financial reports to members. Investors will look at how your Alaska LLC handles money matters to see if it is transparent enough and worth the investment.
Limitation of liability and indemnification
Your Operating Agreement must contain provisions formally separating the LLC from its members. This will limit everyone’s liabilities to the company’s responsibilities and ensure that their personal property and any belonging under their name will not be used to pay for the LLC’s debts. This is very important as it reinforces your limited liability status. Also include provisions for the indemnification, or reimbursement, of members who use personal funds on behalf of your LLC.
Instructions for resolving disputes
Your Operating Agreement must contain guidelines for the resolution of disputes that arise during the normal course of business. The instructions must first aim to solve conflicts internally before getting help from external parties. These guidelines will ensure the smooth operations of your LLC.
Amendments and modifications
You must update the document from time to time so that it accurately reflects the changes that happen to your LLC. Thus, don’t forget to insert provisions allowing the modification and amending of your Operating Agreement. If you do not update your Operating Agreement as necessary, it might become outdated and contain loopholes that could be violated.
Lastly, include guidelines for the dissolution of your LLC. There are many reasons why your LLC may be dissolved, from court orders to the resignation of a member. These guidelines are meant to help your company close properly so that there won’t be any remaining debt.
Why is an operating agreement needed?
Enforceable in Court
The terms outlined in a written LLC operating agreement is usually enforceable in a court of Law.
Opening Bank account
Certain financial institutions require you to produce an operating agreement to verify whether you have “signing power” for the LLC.
If the terms of compensation, roles, and responsibilities are mentioned in the operating agreement, it avoids disputes among LLC members in the future.
Preserve limited liability status
Especially if you are a single-member LLC, having an operating agreement helps ensure your liability status is upheld in court.
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How Much Is An Alaska Operating Agreement?
LLC Operating Agreements in Alaska cost nothing if you make them yourself. However, if you hire a lawyer to ensure legal soundness, you might spend up to $2,500 depending on the size of your LLC and the task you give to your lawyers.
Frequently asked questions
Alaska doesn’t require single-member LLCs to submit an Operating Agreement to form. However, any single-member LLC will benefit from having the document in place. One of these benefits–reinforced limited liability status–is very important.
Yes, if you include provisions allowing amending your Operating Agreement. Make sure you update the document whenever changes happen to your LLC.