What Is An LLC Operating Agreement?
Before diving into the details of an LLC Operating Agreement, let’s start by understanding what exactly an LLC is.
An LLC, an acronym that stands for Limited Liability Company, is a hybrid business structure combining certain benefits and features from other business types. It is easy to form and maintain like a sole proprietorship, but provides asset protection the same way incorporated businesses do. These benefits alone make LLCs popular among new business owners, as well as those looking to form new ventures alongside their existing companies.
LLCs come with a simpler paperwork process for creation and upkeep, along with versatile tax choices. Moreover, they give their owners, called members, the freedom to choose how to run or manage the business. In order for an LLC to function as intended, however, it needs what is known as an Operating Agreement.
Operating Agreements are internal documents containing many details crucial to the company. They act as a company’s operating manual, identifying the LLC and its members and providing instructions on how it is meant to operate. They also include provisions that cover financial matters, conflict resolution, and key processes such as sharing profits, handling losses, and even how the company might eventually come to an end.
Think of Operating Agreements as personalized blueprints for an LLC. They let members shape their roles and connections within the business. Operating Agreements are similar to the Articles of Incorporation used in the formation of the LLC, in that they are both used to describe what the business is meant for and how it will be managed.
Does Minnesota require all LLCs to have an Operating Agreement?
Minnesota does not require LLCs to have an Operating Agreement to be registered with the state. However, experts agree that every LLC needs this document so it can function properly and last long unless it is necessary to shut the business.
An Operating Agreement guarantees a well-functioning LLC by clarifying member responsibilities, guiding financial management, and avoiding managerial conflicts. It also safeguards members’ limited liability status, making sure everyone understands their roles and performs them effectively.
What Are The Advantages Of An Operating Agreement In Minnesota?
An Operating Agreement will provide your Minnesota LLC with the following benefits:
A reinforced limited liability status
Operating Agreements solidify your LLC’s limited liability protection by formally distinguishing your business from its members. This document holds legal weight, assuring that you and fellow members won’t risk personal assets in case of legitimate lawsuits against the company. Single-member LLCs are seen to benefit most from this.
Internal processes made easier
Your Operating Agreement contains detailed instructions on how your company does things. It should be designed to clarify internal procedures, describe everyone’s roles and responsibilities, and provide necessary guidelines when certain issues arise. In turn, this allows your company to minimize confusion, prevent potential misunderstandings, avoid unnecessary problems, and solve internal issues before they occur.
Increased accountability among your LLC’s members
All LLC members will need to discuss the provisions that will be included in your company’s Operating Agreement. If they agree to these regulations, they will affix their signature. Once signed, it becomes a binding contract. This means everyone must adhere to the agreed-upon guidelines in the Operating Agreement, and anyone who intentionally breaches it could face consequences, including legal actions.
More control over your company
Creating an Operating Agreement for your LLC gives you more control over it. Without the document, your LLC will have to be governed by Minnesota’s state rules. While this does not put your company at a huge disadvantage, being able to run your business the way you prefer makes it easier to operate.
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What Are The Limitations Of An Operating Agreement In Minnesota?
Operating Agreements provide your Minnesota LLC with many benefits, but they are also limited in some cases. Here are some potential “disadvantages” to think about:
Does not completely prevent disputes
While Operating Agreements help you settle disputes that may arise, they cannot completely prevent them from happening. This is particularly true for poorly-made Operating Agreements that do not cover all foreseen issues in the company.
Does not allow you to circumvent state laws
Although Operating Agreements allow you to keep state rules at bay, they do not allow you to circumvent these laws and regulations. Your company still has to abide by Minnesota’s laws. Failure to follow the laws can open your LLC up to legal action from the state.
Does not allow you to control members
Lastly, while Operating Agreements are binding and can be used to hold you and your LLC’s co-members accountable, they can never be used to control anyone. Members still have the right to choose what they want to do. The document can, however, be used to pursue them if they put other members or the company at a disadvantage.
What Should You Include In A Minnesota LLC Operating Agreement?
Your LLC’s Operating Agreement has to be customized to meet your company’s needs. It must cover all the bases so that your company will be able to function properly. You must include instructions and provisions for everything that happens inside your company, whether it’s for daily routines or big decisions that have to be made for the LLC.
The very first thing you need to do is make sure the document has all the following basic details:
- Your LLC’s information
- Your LLC’s purposes and powers
- Your LLC’s membership details
Your Operating Agreement must also specify how it will be managed and describe everyone’s roles. To this end, include the following:
- Your LLC’s management structure
- Each member’s roles and responsibilities
Your Operating Agreement must include detailed instructions about your company’s internal processes, specifically:
- Handling Profits and Losses
- Meetings and Voting Procedures
- Record Keeping and Financial Reporting
- Limitation of Liability and Indemnification
- Resolving Disputes
Your Operating Agreement should include provisions allowing for flexibility and your LLC’s eventual closure:
- Provisions for Amendments and Modifications
- Provisions regarding Dissolution and Winding Up
Finally, when crafting your Operating Agreement, be sure to take into account other factors like the size of your company, the industry it operates in, your intended client offerings, and your personal preferences for managing the business. Doing so ensures that you have all important fields covered.
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.
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 A Minnesota LLC Operating Agreement?
The expense of preparing an Operating Agreement for your Minnesota LLC can differ significantly. It’s important to note that the state doesn’t mandate having one, so there’s no obligatory cost. And if you decide to create it yourself, you won’t have to spend a thing either. But if you want experts to help you draft one, be ready to budget around $900 on average.
Frequently asked questions
The state of Minnesota does not require LLCs to have an Operating Agreement regardless of the number of members they have. This means you can start and run your LLC without the document. Creating one, however, will help you run your business properly.
No. Your company’s Operating Agreement will not expire as long as your LLC exists. There’s no need to renew it from time to time.
Yes. You can make changes to your LLC’s Operating Agreement at any time. This is provided that all the members are informed of the changes and agree in writing to apply them to your company