What Is An LLC Operating Agreement?
An LLC Operating Agreement is a legal document that outlines the ownership and operating procedures of your Arkansas business. It lays out the details, such as:
- Member responsibilities
- Financial management
- Voting rights
- Dispute resolution
You can customize this agreement to meet the needs of your business. It protects the rights and interests of everyone involved in the LLC.
Does Arkansas require all LLCs to have an Operating Agreement?
No, the State of Arkansas does not require LLCs to have an Operating Agreement when registering their business. Nonetheless, creating one proactively is beneficial. This is because it explains the expectations for members, which ensures everyone understands their role in the company. Moreover, it provides guidelines for how members or managers should manage the business.
What Are The Advantages Of An Operating Agreement In Arkansas?
Here are four benefits you can expect from creating an Operating Agreement:
Establish a legal boundary for personal assets
While an LLC protects members from business liabilities, an Operating Agreement helps to cement that boundary. The document outlines how profits and losses will be distributed. This way, members’ personal assets remain separate from the business.
Create a clear operational strategy
Running a business can be complex. With an LLC Operating Agreement, you can break down the structure of your organization, including ownership and management responsibilities. This clear operational strategy helps streamline decision-making, minimize conflicts, and protect your business from future legal troubles.
Have a succession plan in place
Your LLC won’t stay the same forever. An Operating Agreement ensures that you have a plan in place for leadership transitions. You can outline how to add new members and provide a roadmap for the business’s future.
Improve chances of external funding
Having an Operating Agreement may boost your company’s chances of obtaining external funding. Lenders and investors are more likely to trust a company that took the time to define its purpose and operations.
Investors need to know the type of company that they will be putting money into. As such, an Operating Agreement can help your chances by providing investors with the information they need.
Create a customized operating
What Are The Limitations Of An Operating Agreement In Arkansas?
Meanwhile, an Operating Agreement still has limitations, such as:
Time-consuming to draft
An Arkansas LLC Operating Agreement can be a complex document. You will have to be deliberate about what you will include. After all, it will dictate how your business runs for years to come.
Moreover, you have to discuss and agree upon several details with your business partners. As such, the process of crafting this agreement can take time and effort, so be prepared to dedicate hours to drafting the agreement.
Still subject to Arkansas law
Even if an Operating Agreement lets you customize your Arkansas LLC, it is still subject to state laws. This means that no matter what you include in the document, you must comply with all relevant statutes.
This can seem limiting to LLC owners since you might not be able to fully customize your LLC. However, these laws are in place to protect consumers and businesses alike.
No guarantee of dispute-free operations
This document can help create a framework for conducting business, but it can’t guarantee an LLC’s members will never disagree. It is up to the members to work together and resolve any issues that may arise.
Nonetheless, having an Operating Agreement that clearly states how the LLC is run and owned can help reduce the chances of disputes.
What Should You Include In An LLC Operating Agreement?
These are the sections you should include in your Arkansas LLC Operating Agreement:
Member duties and ownership
Your agreement should state each member’s role and duties. This includes what they should be doing as an LLC member and how they can contribute to the success of the business.
Moreover, the document should also state what percentage of ownership each one has. This way, everything is clear outright, and there is no confusion later on.
Profit and loss distribution
Your Operating Agreement should also state how much of the company’s profit or loss each owner will be allocated. This should be clearly defined and agreed upon by all LLC members in order to avoid misunderstandings down the line.
Meeting and voting processes
Members of the LLC must meet regularly to touch base on the progress of their business and to vote on important decisions. The operating agreement should specify how often meetings are held, who should attend, and how voting takes place.
Buyout and buy-sell protocols
As mentioned, your Operating Agreement must include a succession strategy to handle the departure of one or more owners. This buyout protocol or buy-sell plan should outline how ownership transfers will be handled if an owner leaves the LLC.
Will the remaining owners buy out the departing owner? Will the LLC itself be responsible for purchasing the departing owner’s shares? You can answer these questions in your Operating Agreement to ensure that the transition is smooth and fair.
How To Form An Operating Agreement
Forming an Operating Agreement entails the following steps:
Know how you want to structure your LLC
To ensure that the business runs smoothly, it’s important to decide how you want to structure your LLC. This includes defining the roles and responsibilities of members. It also entails creating a management plan to determine decision-making authority.
Create an outline for the agreement
Next, you must create an outline for the agreement. It’s best to get an overview of what provisions you want to include and how they will be organized. Start by listing the main sections and then the subsections for each. This will help ensure that all aspects of the agreement are addressed.
Draft the rest of the document
Once you have the outline, you can fill in the rest of the document. This is the part where you dive into the details of your Operating Agreement.
If you’re unsure of the legal terms, consult a lawyer to ensure your agreement is legally binding. Your attorney can also help you make sure the document is compliant with Arkansas regulations.
Review and make amendments
After finishing the first draft, you can go over the document and make amendments if necessary. You should discuss the terms with all the members of the LLC before signing.
Have members sign the Operating Agreement
Once everything looks good, have all members of the LLC sign the Operating Agreement. This shows their agreement and commitment to follow the regulations in the document.
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.
Create a customized operating
How Much Is An Arkansas LLC Operating Agreement?
If you’re creating the Operating Agreement yourself, it may cost nothing more than your time. However, for a professionally drafted document, you’ll need an attorney that specializes in business documents. Prices range from $100 to $2,000 depending on the complexity of your provisions and the size of your business.
Frequently asked questions
You can create a simple LLC Operating Agreement by using a template. Most templates include provisions for how to manage the LLC, designate members and their roles, outline voting rights, and more.
A member’s ownership percentage is typically determined by the amount of capital each member contributes. This could be in the form of cash, property, or services. The Operating Agreement should include a section that outlines how contributions are valued and allocated between members.
Manager-managed LLCs have one or more designated managers who are responsible for making day-to-day business decisions. Member-managed LLCs, on the other hand, are managed by all members as a group. Each member has an equal say in decisions and votes on them according to their ownership percentage.