What Is An LLC Operating Agreement?
An Operating Agreement is an internal document that contains all the necessary information for an LLC to function properly. It identifies the LLC it belongs to and provides details about the owners, called members, of the company. The document also provides guidelines and instructions for all of the business’s internal processes.
Does Montana require all LLCs to have an Operating Agreement?
LLCs in Montana are not required to file Operating Agreements with the Secretary of State’s office. However, the document contains necessary provisions that safeguard the business’s operations and clarify how things should be done.
What Are The Advantages Of An Operating Agreement In Montana?
While an Operating Agreement is not necessary to form an LLC, it brings many benefits that make doing business easier. Here’s a quick look at some of them:
It lets you customize your business procedures
An Operating Agreement lets you customize how you will run your business. It lets you bypass Montana’s default rules governing LLCs, so you can run it according to your preferences. Just be sure to stay within the limits of the state’s existing laws so you don’t commit violations.
It strengthens accountability among members
An Operating Agreement becomes binding the moment all members sign and enforce it. This means everyone can be held to account for any intentional violation of the regulations inserted in the document. This will help you keep all members aligned with the company’s goals.
It clarifies business goals and procedures
An Operating Agreement specifies the purposes for which your LLC was formed. It effectively gives your business a direction to follow and goals to pursue. The document also provides guidelines and instructions on how to attain those goals. With an LLC Operating Agreement in place, every action you make in your company is geared towards the success of your business.
It protects your personal assets from lawsuits
Should your Montana business be sued for negligence and other reasons, your Operating Agreement will be there to protect your personal property from being used to pay for your LLC’s obligations. The document does this by separating you and any co-member from your business so that the business will have to settle its own dues.
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What Are The Limitations Of An Operating Agreement In Montana?
While an LLC Operating Agreement is very useful, it does have some limitations preventing you from using it for certain things. Here’s a quick look:
It does not allow you to violate state laws
The provisions inserted in your Operating Agreement must never violate existing rules in place in Montana. Doing so can cause courts to render them illegal and unenforceable. Your business might even be ordered to close for encouraging law violations.
It does not have control over external factors
A comprehensive Operating Agreement governs all matters inside your company. However, it can never control external factors such as Montana’s policies or natural disasters such as wildfires and earthquakes. These uncontrollable variables may affect your business, so consider them when planning your Operating Agreement.
What Should You Include In A Montana LLC Operating Agreement?
As your LLC’s operations manual, your Operating Agreement must contain all the necessary information to cover all the aspects of your business. This means the document must be able to identify your LLC and its members and also list down the purposes for the formation of your company.
The document must also contain guidelines for every internal process involved in your business and describe in great detail the relationships between the members and/or managers of your LLC. It must also provide instructions for handling finances, solving disputes, and the proper closure of your business if ever there’s a need for it.
How To Form An Operating Agreement
Before you start writing your Operating Agreement, study the provisions included in the Montana Limited Liability Company Act. This will give you a good grasp of the state’s laws for LLCs, which you can use as a basis for your business’s own regulations. You can use them as is or tweak some of them to suit your specific needs.
After that, read on the best business practices in the state. If you run a multi-member LLC, it is best to do this with all co-members so you can discuss potential issues as well. Take time to do this so you can craft provisions for every imaginable scenario your business might face in the future.
Once you’re done with that, you can proceed to the writing of your Operating Agreement.
Identifying your LLC
Begin by providing details about your LLC, specifically its name and address. Include the name and address of your registered agent here as well.
Moreover, don’t forget to specify the reasons why your LLC was formed in the state. The purpose statements you provide here will set the direction your company will follow. This will give all members a sense of clarity on why you are doing business.
Next, provide details identifying all the members of your LLC, including interest percentages. You must also detail how to add new members, transfer membership interests, and withdraw membership from the LLC.
Then, specify whether your LLC is member-managed or manager-managed. For reference, a member-managed LLC is actively run by members who play specific roles in the business, while a manager-managed LLC is run by people whom the members have appointed for the task.
Member roles and responsibilities
In this section, write down a detailed list of all the roles and responsibilities the members and/or managers of your LLC have. This lets you limit each person’s authority to their respective roles and sets every expectation they have to meet.
Guidelines for distribution of profits and losses
Here, you need to include guidelines and instructions on how profits and losses will be distributed among members. In Montana, these are typically given according to interest percentages, but an Operating Agreement lets you modify that. Don’t forget to specify how and when distributions will be made.
Every Operating Agreement must provide detailed descriptions of your accounting processes. For example, write down how your LLC monitors and records financial transactions, as well as how it should be providing reports about its members. Much like everything else we’ve noted, this helps you set clear expectations that everyone will agree to meet.
Lastly, your Operating Agreement should contain clear instructions for the dissolution of your LLC, should the need arise. These instructions must outline the steps to settling all outstanding debts and ensuring the proper distribution of remaining assets among your current members.
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 Montana LLC Operating Agreement?
As long as you make it yourself, you technically don’t need to spend anything to create an LLC Operating Agreement in Montana. There are also no associated filing fees since the state does not require you to file the document. However, if you’re looking to hire a lawyer to help you review your draft or even completely write the document for you, you must be prepared to spend upwards of $200.
Frequently asked questions
While you will never need an LLC Operating Agreement to form a business in Montana, it’s helpful to have one as additional proof of your LLC’s ownership.
Yes, but only if you insert provisions allowing amendments to your Operating Agreement. Plus, we highly recommend that you update the document to reflect every change that happens to your business.