How To Form An Operating Agreement

When creating your LLC’s Operating Agreement, you must take care to include all the details necessary to run your company. Meticulously doing this allows you to avoid leaving any loopholes that might be exploited. We suggest getting professional help from lawyers for this matter. 

You can also follow the instructions below if you want to create the document yourself and save money. We’ve already outlined some of these points above, but we’ll go into more detail about them here.

Information about your LLC

First, start by providing information that will identify your company. These details must be identical to the ones indicated in the Articles of Organization you submitted to the Minnesota Secretary of State while you were still forming your LLC. Your Registered Agent’s details have to be included in your Operating Agreement as well. They play a crucial role in your company, handling important legal papers and acting as the liaison with the state of Minnesota on your company’s behalf.

Details about your LLC’s purposes for existence

Your Operating Agreement must explain in detail the purposes for LLC’s formation, and what your company intends to do after achieving its goals. This serves as your company’s mission and vision, and LLCs typically dissolve after meeting their goals by default. Indicating what your company’s goal is and what you intend to do after it achieves its purposes can finalize its dissolution or prevent it from happening.

Details about your LLC’s membership

In every Minnesota Operating Agreement, it’s essential to provide thorough details about your LLC’s membership. This involves identifying the members and outlining their contributions and ownership percentages. You must also include clear guidelines for managing and handling membership, including procedures for any changes. 

• Guidelines for adding new members
• Guidelines on membership withdrawal, including the procedure and consequences
• Guidelines for the transfer of membership interests
• The company owner’s names and addresses
• Their capital contributions and respective ownership percentages

Details about your LLC’s management

Next, specify how your LLC will be managed. This is very important as it determines the level of participation your LLC’s members will have in your business. There are two structures: Member-managed, and Manager-managed.

• Member-managed LLCs, as the phrase implies, are run by the members themselves. In this setup, members take on a more active role in the day-to-day activities of the business and do not need to hire a manager for the role.
• On the other hand, manager-managed LLCs are supervised by a manager the members appointed. In this setup, the members take on a more passive role and are rarely seen taking up major roles in the business’s daily routine. Instead, the members only receive reports and updates from their appointed manager.

Membership roles and responsibilities

After specifying your LLC’s management structure, you must then list down the roles and responsibilities that each member has. This clarifies everyone’s tasks and the expectations given to each one of them. It also sets clear limits on the authority and responsibilities every individual possesses. By doing this, you prevent members from overstepping the bounds, while also avoiding potential misunderstandings and disputes that could arise.

Instructions for handling profits and losses

Next, you must include instructions on how your company should handle its profits and losses. The instructions must be clear and detailed enough to avoid any loopholes or confusions. 

These must be included in this part of your Operating Agreement:

• Specific details regarding the distribution of profits and losses among members
• Details on how and when members will receive profits
• Details on how the company’s losses will be allotted among members

Profits and losses are typically distributed according to ownership percentage. If this matter confuses you, consider asking lawyers or accountants for their input.

Guidelines for your LLC’s Meetings and Voting Procedures

Your LLC must regularly hold meetings so that members can be updated on the company’s progress, as well as its financial status. Special meetings can also be organized for various purposes, such as when making company decisions. Your Operating Agreement must include instructions on how you can organize and conduct these meetings for your company’s benefit. 

Make sure to include the following:

• Details about the process of organizing, scheduling, and conducting meetings
• Details about the process of informing members about upcoming meetings
• Instructions for rescheduling meetings if members are not available to attend
• Provisions for each member’s right to vote and contribute to the company’s decision-making processes
• Details regarding voting and the vote-counting process

Guidelines for record-keeping and financial reporting

Your Operating Agreement needs to include guidelines that will ensure accurate record-keeping and transparent financial reports. These will help your company become trustworthy when it comes to financial matters, and will also help prevent disputes and issues that could arise with regard to the handling of your revenue. 

The following should be included:

• A clear and detailed explanation of how your accounting system works. This means describing how you monitor financial transactions, record revenues, keep track of expenses, and keep up with tax obligations.
• A description of your company’s fiscal year. This could be a calendar year or a 12-month period starting at any time during the year.
• Details about your company’s tax treatment and filing requirements. Specify how your LLC has elected to be taxed by the IRS. Also indicate any required filings with Minnesota.

Guidelines on Limitation of Liability and Indemnification

This part outlines how your LLC protects its members’ personal assets from being used to pay penalties and dues meant for the company. It also describes how members will be reimbursed for the personal resources they spend on behalf of the company.

Make sure to include the following:

• Provisions limiting each members’ and managers’ liabilities for the LLC’s incurred obligations.
• Provisions providing for the indemnification of members who spend personal funds for the LLC’s activities.
• Details regarding Insurance Requirements. Although your LLC is able to protect its members’ personal belongings, getting insurance expands the level of protection it provides. Make sure to include details about insurance requirements.

Guidelines for dispute resolution

Make sure to include instructions on how your LLC should resolve disputes occurring inside the company. While the other provisions mentioned in this guide are able to keep most issues at bay, there is still a possibility that problems can occur. Include clear instructions that will help everyone resolve these issues.

Provisions for amendments and modifications

As your LLC grows, you will see the need to introduce new guidelines or make updates to existing provisions outlined in your Operating Agreement. To accommodate these changes, you must include provisions allowing modifications and amendments to the document.

Provisions regarding dissolution and winding up

Lastly, your Operating Agreement must include detailed instructions on how it will go through the process of dissolution. There are many reasons why an LLC can get dissolved, but by default it can be shut down once it fulfills its purpose. Other reasons for an LLC’s dissolution include a member’s untimely resignation or departure, and a court order mandating the company’s closure.

That said, your Operating Agreement must describe its dissolution process in detail. It should contain details telling how it can settle matters before it is finally closed down. This includes instructions for asset liquidation, debt settlement, filing tax returns, and post-liquidation asset distribution according to ownership percentage.