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Massachusetts LLC Operating Agreement
As you form your Limited Liability Company and start operations, you’ll find that it’ll be easier on you to have a set of rules on how things are going to be done. Moreover, you’d want this set of rules and regulations to be recorded on paper for everyone in the business to see and review from time to time. What we’re saying is: your LLC needs an Operating Agreement. Let’s talk about what that is and how you can make one.
What is an LLC Operating Agreement?
An LLC, which stands for Limited Liability Company, is currently the most popular structure among small and medium-sized businesses in the United States. It offers a winning combination of simplicity found in sole proprietorships and general partnerships, along with the legal protections typically associated with incorporated businesses. This makes it an attractive option for many startups and entrepreneurs.
Operating Agreements serve to provide LLC owners with a printed copy of how the business works. Having an Operating Agreement in place helps members know their roles and responsibilities, keeping everyone in line.
Definition
An Operating Agreement is an internal document that serves as a blueprint for your LLC. It allows you to customize or structure the financial and working relationships between the members of your LLC according to your business’s needs. We find it similar to the Articles of Incorporation in the sense that it helps you govern your company’s operations.
Operating Agreements typically contain crucial details pertaining to your Massachusetts LLC. It can include basic information about your Limited Liability Company, its members, as well as their roles and responsibilities. It usually also provides details as to how the LLC elected to be taxed and can even contain guidelines on how certain procedures and issues will be handled, including what to do when a member departs.
Does Massachusetts require all LLCs to have an Operating Agreement?
The state of Massachusetts does not require LLCs to have Operating Agreements. However, LLCs always benefit much from having one. While you can legally operate without one, having this internal document can bring clarity and structure to your LLC’s operations. It helps outline the roles, responsibilities, and relationships among the members, providing a clear framework for decision-making and dispute resolution.
Once all of your members have signed the document, it becomes a binding set of rules and regulations all of them have to follow while the business exists. An Operating Agreement will help protect your limited liability status and prevent managerial misunderstandings. Without this document, your company will be forced to run according to your state’s laws by default.
What Are The Advantages Of An Operating Agreement In Massachusetts?
An Operating Agreement gives your LLC a few benefits, namely:
It protects your company’s limited liability status
Operating Agreements help you ensure that courts will always honor your limited liability status. This fact is especially applicable in single-member LLCs. Without the presence of a formal agreement separating the LLC from its members, the business will look and feel more like a sole proprietorship than an incorporated entity. Operating Agreements help establish that separation in the eyes of the courts
It cements agreements between the LLC’s members
An Operating Agreement plays a crucial role in an LLC’s formation. It solidifies the terms and conditions that all members agree upon when starting the business. As the company grows and becomes more successful, this document becomes even more valuable. It serves as a guide to hold members accountable and ensures that everyone follows the rules they previously agreed upon.
It helps you gain more agency and freedom
Without an Operating Agreement in place, your LLC will be subjected to Massachusstes’ rules by default. While that in itself is not a bad thing, it will limit how you manage your LLC. Creating an Operating Agreement allows you to have greater agency and freedom to manage how your company functions and regulates itself.
It clarifies how things will be done in the company
An Operating Agreement acts as an operations manual, providing members with instructions on how to deal with things. It defines everyone’s roles, limits responsibilities to whoever is actually in charge of certain tasks, and gives instructions on how to settle whatever internal issue might occur. This includes the division or sharing of profits and losses, among many things.
Create a customized operating
agreement now!
- Digital signatures
- Agreement amendments
- Multiple versions
What Are The Limitations Of An Operating Agreement In Massachusetts?
Operating Agreements are very helpful to Massachusetts businesses and other entities alike. That said, they do have limitations and are not a one-size-fits-all solution or tool for your company. For example, while this document allows you to escape being governed by state laws by default, it cannot go against any state regulations whatsoever. All they do is give you more freedom to manage your business.
What Should You Include In A Massachusetts LLC Operating Agreement?
The Operating Agreement for your LLC in Massachusetts must provide all the details needed to run your company. By having a well-thought-out Operating Agreement, you can avoid confusion and close any potential loopholes that might be exploited in the future. That said, your document needs to be customized to suit your business’s needs. It should contain details specific to your industry, the size of your company, your services, and how you plan to operate.
At the very least, your Operating Agreement must include the following details:
Details about your LLC
Your LLC’s Members and Ownership
Details regarding the distribution of Profits and Losses
Your LLC’s Management Structure
Your LLC’s Guidelines for Meetings and Voting Procedures
Details regarding Record Keeping and Financial Reporting
Instructions to handle Dissolution and Winding Up
Details regarding Dispute Resolution
Provisions for Amendments and Modifications
How To Form An Operating Agreement
Now let’s talk about forming your Operating Agreement. You can create it yourself by including the details indicated below, but we encourage you to ask lawyers to help you craft one that is better tailored for your business.
Details about your LLC
Your Operating Agreement should clearly identify your company. As such, it must include the basic details about your LLC like:
- The name of your LLC
- Your business address
- The purpose of your LLC
- Your Registered Agent
Your LLC’s Members and Ownership
Next, your Operating Agreement should include details about your LLC’s founding members, their contributions to the business, and other details regarding your company’s membership. Here’s what we mean by that:
- Details regarding your LLC’s initial members, including their names and addresses
- Ownership Interests. This refers to each member’s ownership interest percentage
- Capital contributions. This refers to the amount each member contributed to the LLC.
- Additional members. This refers to the process your LLC has to admit new members. It should include details regarding their rights and responsibilities.
- Transfer of membership interests. Your Operating Agreement should include provisions or instructions regarding the transfer of membership interests.
- Membership withdrawal. Your Operating Agreement should say how members can withdraw from the LLC and also provide details on the consequences of their withdrawal.
Information regarding the distribution of Profits and Losses
The Operating Agreement must explain how you will handle the LLC’s finances, particularly its revenues and losses. Always have these two sections:
- Distributions to Members. This refers to the process of distributing profits to the members of your LLC. It should include details on the manner and frequency of distributions.
- Profits and Losses. Your Operating Agreement should provide details regarding allocating profits and losses to each member.
Your LLC’s Management Structure
It’s imperative to specify what kind of management structure your LLC has. This will greatly affect the members’ say in the business, as well as how your LLC will operate. For instance, your document must specify whether your LLC will be member-managed or manager-managed. Member-managed LLCs are actively run and managed by members. On the other hand, Manager-managed LLCs are run by managers appointed by the members. The members are more passive in the latter.
Your LLC’s Guidelines for Meetings and Voting Procedures
Next, your Operating Agreement must specify details regarding how you conduct meetings and make decisions as a company. Clearly specify each member’s and manager’s right to vote and contribute to the company’s decision-making process. Details about the voting and vote-counting process must also be included. Your Operating Agreement must also provide details regarding meeting schedules and frequency, how special meetings can be organized, and the Notice Requirements for each meeting.
Details regarding Limitation of Liability and Indemnification
Your LLC is able to protect the personal assets of all its members. However, details about this must be specified in your Operating Agreement for it to work properly. Below are a couple of details your document must include:
- Liability of Members and Managers. Your Operating Agreement must limit members’ and managers’ liability for the LLC’s obligations. This is in accordance with the law.
- Provisions for Indemnification. Details regarding the reimbursement or indemnification of members who act on behalf of the LLC should be included in the Operating Agreement.
- Insurance Requirements. While your LLC can protect your personal assets, you must also consider getting insurance for added coverage and indicate the requirements for this in your Operating Agreement.
Details regarding Record Keeping and Financial Reporting
Your Operating Agreement must include details regarding the accurate recording and frequent reporting of your company’s financial transactions. It is important to include details about the accounting of transactions and auditing of financial records.
- Your company must indicate its fiscal year in the Operating Agreement. This could be a calendar year or any 12-month period beginning at any time during the year.
- Accounting and Recordkeeping. Your Operating Agreement must include details about your company’s accounting system, which is used to keep track of financial transactions, revenues, expenses, and tax obligations.
- Tax Treatment and Filing Requirements. Your Operating Agreement must specify how your LLC has elected to be taxed and also indicate any required filings with the state.
Instructions to handle Dissolution and Winding Up
Your LLC can be dissolved for various reasons, and it’s important to have a clear and straightforward Operating Agreement that outlines the potential scenarios for dissolution. It should specify the events that might trigger the dissolution, such as a member passing away or leaving the LLC, a unanimous decision by all members to dissolve the company, the fulfillment of a specific purpose the LLC was created for, or a court order mandating the dissolution.
Your Operating Agreement must also include details on how your company can wind up its affairs in the event that it is forced to shut down. Include information on how you settle debt, liquidate assets, and prepare and file tax returns. It must also specify how your company will distribute its remaining assets once it is dissolved. Assets are normally distributed according to ownership interests.
After winding up, you can then process a Certificate of Cancellation (or Article of Dissolution) and file it with the Massachusetts Secretary of State.
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.
Avoid disputes
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
agreement now!
- Digital signatures
- Agreement amendments
- Multiple versions
How Much Is A Massachusetts LLC Operating Agreement?
You are not required to file an Operating Agreement for your LLC in Massachusetts—which means you technically won’t have to spend anything to create one for your business. However, if you decide to seek legal advice to draft an Operating Agreement, be prepared to spend around $200, depending on the professional you consult. Remember, having an Operating Agreement can be beneficial for your LLC!
Frequently asked questions
No. Again, Operating Agreements aren’t required in Massachusetts. However, creating one is very beneficial—especially if you’re a single-member LLC. It will help the court separate your business (as an entity) from your person.
No. You are not required to file an Operating Agreement along with the paperwork for your LLC. Your Operating Agreement is an internal document you keep inside your company.