What Is An LLC Operating Agreement?
An Operating Agreement is an internal document that contains the terms and conditions LLC owners, called members, agreed on. It serves as your proof of ownership over the business. The document also outlines the company’s goals and purposes and provides information about the business, its members, and its internal processes.
An LLC Operating Agreement contains provisions designed to make the company function properly. It has instructions and guidelines for most concerns the business may have and also provides guidance when solving problems. The document also provides the LLC with benefits crucial to its success.
Does Indiana require all LLCs to have an Operating Agreement?
The state of Indiana does not require LLCs to have Operating Agreements. However, they do encourage them to draft one as per state code 23-18. Running a business without one also puts your company at risk for many disadvantages, and it is always good practice to have one, especially if you are a solo member.
What Are The Advantages Of An Operating Agreement In Indiana?
Operating Agreements provide you and your LLC with many benefits. Here’s a quick look at some of them:
It allows for better control of your LLC
Your company will be governed by the state’s laws for LLCs if you do not have an Operating Agreement. For example, Indiana state codes indicate that managers in a manager-managed LLC can only be appointed or removed after a majority of the members approve the decision. If you want to change this so that all members, not just a majority, have to give their approval, you can do so using an Operating Agreement. This document will override the default regulations, allowing you to create rules according to your preferences.
It protects your personal assets
An Operating Agreement contains provisions separating the LLC from its owners, limiting the latter’s liabilities over the company’s dues. This reinforces the protections an LLC gives to your personal assets. Courts will see your Operating Agreement if your company gets sued, and they will honor your limited liability status.
It simplifies your business goals and processes
Your Operating Agreement contains detailed descriptions of your company’s purposes, as well as instructions regarding handling different concerns. These aim to simplify your business processes. With this document, the members and managers of your LLC won’t have to second guess what to do for your company.
It prevents disputes
The descriptions and instructions in your Operating Agreement serve to minimize the risks of misunderstanding in your company. They clear up any confusion related to responsibilities and profit distribution, preventing disputes from arising.
It helps you win investors
Your Operating Agreement shows the terms and conditions people need to know before investing in your company. If they discover that your company has attainable goals, shows promise in terms of investment returns, and is equipped with a reliable system that works, they just might invest in your LLC as soon as possible.
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What Are The Limitations Of An Operating Agreement In Indiana?
While your Operating Agreement has its benefits, you can’t completely rely on it for everything because of its limitations, which include the following:
It could be seen as unimportant
The state of Indiana does not require your LLC to have an Operating Agreement to be registered. This could be misinterpreted to mean that the document is not at all important since it’s “optional” for your business. Because of this, some might think it’s a waste of time and resources. However, the opposite is true—this document is crucial to your business operations.
It cannot completely prevent problems from happening
A well-written Operating Agreement contains comprehensive instructions to cover almost all of your LLC’s concerns. Still, it does not have control over external factors that could cause problems. These uncontrollable elements, such as the stock market, extreme weather changes, and meddling by rival companies, can still cause issues to happen.
What Should You Include In An Indiana LLC Operating Agreement?
When crafting your Operating Agreement, you need to make sure to include all kinds of information pertaining to your company, its identity, members, and processes. The document will serve as a handbook guiding all members and managers so that the business works as intended.
To be more specific, below is the bare minimum it should have:
- Your LLC’s identifying details
- Your business purposes and planned duration
- The management structure of your LLC
- Individual members’ roles and responsibilities
- Guidelines for membership changes
- Details regarding decision-making processes
- Details on members’ voting rights
- Guidelines for conducting meetings
- Your accounting and record-keeping system
- Guidelines for profits and losses distribution
- Instructions for dispute resolution
- Dissolution and winding up
How To Form An Operating Agreement
Now, let’s discuss how you actually create an Operating Agreement for your company. The process might become challenging, so make sure to do your research and read up on the important matters to consider when making one for your LLC. You can then create your own using our tips below or by getting help from a lawyer.
Your LLC’s details
Start by providing details about your LLC, such as its name and business address. Don’t forget the name and address of your registered agent as well. After all, they are you and the government’s communications “bridge.” If anything that concerns your company comes up, your agent will be the first person to know.
Your purposes and duration
Next, specify the purposes or intentions for creating your LLC and say how long the company will last. If you plan to dissolve your company after meeting its goals or want to keep it running under new management by then, you need to indicate that here. Courts can order the closure of your LLC if it isn’t making any progress toward its purposes.
After that, you must indicate the management structure your LLC has chosen. It can be member-managed, where owners are the ones actively managing the business, or it can be manager-managed, where a manager or manager appointed for the role runs the business while the members take a more passive stance.
In this section, you must provide details regarding the members of your LLC, including their names and addresses. You must also specify the individual capital contributions each member gives to the business and their corresponding interest percentages. After that, describe in detail the roles each member plays and their responsibilities in your LLC.
Guidelines for membership changes
Here, you will discuss how your LLC handles changes in its membership. These guidelines must provide instructions for when adding new members and when transferring membership interests. You must also include provisions for membership withdrawal and explain the consequences of withdrawing from your LLC.
Your accounting and record-keeping system
Provide information about your company’s accounting system. This includes details about your cash flow, accounting of transactions, record-keeping, and reporting. You also need to specify how your LLC will be taxed and indicate your fiscal year. Be as detailed as possible here so that everyone in your company knows your financial status and that profits are indeed being made.
Guidelines for profits and losses distribution
Next, establish guidelines for distributing profits and losses among the members of the LLC. These are usually distributed according to interest percentages as per Indiana laws, but you can tweak this using your Operating Agreement. Make sure to be as detailed and precise as possible here so that disputes about income are avoided and settled if ever they arise.
Disputes are sure to happen in any company, including yours. For this, you need to include guidelines for resolving any argument or conflict that could arise. These instructions could include ways to solve the issues internally before necessitating external mediation.
Amendments, modifications, and severability
This section includes provisions allowing the members of the LLC to make changes to the Operating Agreement. These changes could be something as simple as amending and modifying internal rules to make them more effective or completely severing them from the document if they are unenforceable.
Dissolution and winding up
Lastly, you must provide guidelines on how your LLC will be dissolved. These include explanations for why your company is getting dissolved and step-by-step instructions on what its members should do afterward. You must also include instructions for liquidating the remaining assets of your LLC.
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 Indiana LLC Operating Agreement?
Operating Agreements cost almost nothing if you make it yourself. There are many free templates on the internet, but you can purchase software used to create them for about $100 or less. If you want to ensure the reliability of the document, however, hire lawyers to help you. Professional fees vary with the amount of work needed for your Operating Agreement.
Frequently asked questions
The state of Indiana does not require LLCs of all membership sizes to have an Operating Agreement. However, single-member LLCs should have one because of the benefits it brings to the company, especially for the protection of personal assets.
No. Operating Agreements in Indiana do not expire. But they can become irrelevant and useless if they are not updated with time.
Yes. But for this to happen, you must include provisions permitting amendments and modifications to be made to the Operating Agreement. For multi-member LLCs, changes also have to be approved by the entire membership before they can be applied.