What Is An LLC Operating Agreement?
An Operating Agreement is an internal document outlining the relationships between an LLC’s owners, who are called members. It also serves as a manual describing how the business should work.
Does Hawaii require all LLCs to have an Operating Agreement?
Hawaii technically does not require LLCs to have an Operating Agreement. However, Hawaii LLCs that want to grow their business and make an impact in the state should have one anyway. This is because an Operating Agreement offers many structural and relational benefits your business must have.
What Are The Advantages Of An Operating Agreement In Hawaii?
An Operating Agreement provides LLCs with many advantages, such as:
Improved business structure
An Operating Agreement clearly outlines the roles and responsibilities that the members and/or managers of an LLC have. It also describes the business’s internal processes in great detail. With the document in place, everyone will know who does what and how to respond to most situations the company may face.
Transparency in finances
Your Operating Agreement allows your Hawaii LLC to gain the trust of all its members, investors, and even customers by helping establish transparency in financial matters. For example, the document completely describes how funds are handled, indicates how much members earn, and discusses how liquidated assets are distributed. These details are important to convincing investors to invest.
Protects your personal assets
Your personal properties, such as houses or vehicles under your name, as well as those belonging to other members, will be protected by your LLC’s Operating Agreement from lawsuits. The document does this by separating you (and your co-members, if applicable) from your company. By doing this, your Operating Agreement limits members’ liabilities over the LLC’s legal obligations.
Better control over your business
An Operating Agreement allows you to create customized regulations for use in your LLC. With the document in place, you won’t have to govern your business using Hawaii’s default rules. You can manage your LLC according to your preferences.
Create a customized operating
What Are The Limitations Of An Operating Agreement In Hawaii?
An Operating Agreement is a very powerful document, but it has some limitations preventing you from doing certain things in your LLC. For example, the document has no control over external factors that may affect your business operations. These include changes to Hawaii’s government regulations or the fact that the state has to import most of the supplies used for your business.
Also, while an Operating Agreement lets you customize the regulations used inside your company, the rules you create have to be at least not inconsistent with the state’s default laws for LLCs.
Moreover, you will need to spend a lot of time researching what needs to be placed in your Operating Agreement for it to be as comprehensive as possible. You might also need to hire a lawyer to either evaluate the document you personally made or have them write it for you from scratch.
What Should You Include In A Hawaii LLC Operating Agreement?
Your Operating Agreement will serve as your Hawaii LLC’s manual. This means it must include all kinds of information used to identify your company and its members and also provide details regarding your internal processes.
The document should contain information about your LLC’s goals, discuss how it will be managed, and describe the roles and responsibilities that each member has. It must then provide instructions on what to do in every situation or activity the LLC is involved in.
How To Form An Operating Agreement
Before you start working on your Operating Agreement, make sure to review Hawaii’s Uniform Limited Liability Company Act to get an understanding of the state’s default rules for LLCs. The state’s laws are a good basis for your LLC’s customized regulations. You can then use its provisions for your company or slightly tweak them to suit your business’s needs.
After that, look into the best practices for your LLC’s industry in Hawaii. Read up on the considerations businesses have to make in the state so that you can include provisions for them in your Operating Agreement.
First, indicate the name and address of your LLC, and specify the name and address of your registered agent as well. Your registered agent will be the one receiving correspondence from the state for your company and will interact with them on your behalf.
Next, indicate the names and addresses of every member of your LLC. Specify their capital contributions and respective interest percentages as well. This part serves as proof of ownership of your LLC and will become a reference for when the court reviews your documents. Indicating interest percentages also helps you establish transparency when it comes to the profits all members receive from the business.
After that, specify the purposes for your LLC’s founding. These will serve as your mission and vision statements, setting a direction for your business. Be as detailed as possible because if your goals are attainable, you just might attract investors who will believe in them.
Management style and membership roles
In this section, indicate how your LLC will be managed. There are two management structures: member-managed, where the members are the ones running the business, and manager-managed, where the members entrust all management to a manager.
Specify in detail the roles and responsibilities of each member. Doing this removes all confusion with regard to the tasks everyone does and prevents potential disputes related to the matter. It also sets expectations everyone will follow. Don’t forget to provide instructions for adding new members, transferring membership interests, or withdrawing from the membership.
In this section, you must provide a detailed explanation for how your LLC monitors and records financial transactions and provides financial reports to members. Specify your tax treatment and fiscal year here as well. Investors will read this part to see if your business can be trusted to handle finances with integrity.
Limitation of liability
You must include provisions formally separating your LLC from you and any co-members. This reinforces your limited liability status and protects your personal property if your business gets sued. Courts will honor the provisions you include here.
A good Operating Agreement provides clear instructions for resolving disputes that arise during the normal course of business. Your guidelines here must prioritize solving such problems internally before seeking help from outside sources such as The Mediation Center of The Pacific.
Lastly, provide guidelines for the proper dissolution of your company. There are a number of reasons that could trigger your LLC’s closure, but regardless of them, you must be able to handle it properly. Include a step-by-step process that begins with getting consent from all members, followed by notifying suppliers, liquidating remaining assets, and formally closing the business.
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 A Hawaii LLC Operating Agreement?
An Operating Agreement in Hawaii technically costs nothing if you prepare it personally. If you want ready-to-use templates, you can find some on the internet with prices ranging from $50 to around $200. Prepare to spend more than $200 if you hire a lawyer to help you draft an Operating Agreement.
Frequently asked questions
No, in terms of LLC formation, but yes, if you want your LLC to operate properly. The state of Hawaii does not require LLCs to submit Operating Agreements. However, your company must not ignore the benefits you can get from such a document.
Yes, if you include provisions allowing amendments and modifications to be made to it. Remember that Hawaii Revised Statute §428-103 prohibits LLCs from changing certain provisions. You can view the list of nonwaivable provisions here.