What Is An LLC Operating Agreement?
An Operating Agreement is an internal document used to give Oklahoma LLCs direction and structure. It contains information about the company and its owners, called members, and also provides guidance on how the business should function.
Does Oklahoma require all LLCs to have an Operating Agreement?
Oklahoma does not require LLCs to register their Operating Agreements in the state. However, as per Title 18 of the Oklahoma Statutes, such businesses are encouraged to create the document and enforce it. This allows them to govern their business according to their needs.
What Are The Advantages Of An Operating Agreement In Oklahoma?
An Operating Agreement gives LLCs many advantages compared to doing business without it. Here’s a quick look at them:
Bypass state rules for LLCs
Oklahoma has default laws for LLCs. These rules will govern your company if they do not have an Operating Agreement in place. While these regulations will not put your business at a disadvantage, being able to set up your own rules makes doing business easier.
Reinforced asset protection
An Operating Agreement strengthens the protections an LLC gives to its members by formally separating the business entity from its owners, limiting your liabilities to the company’s debts. This means that if your LLC gets sued for a valid reason and loses in court, you cannot be forced to liquidate your personal properties to pay penalties.
Keep members in line
Your Operating Agreement contains the terms and conditions all members agreed upon. Once signed, the document becomes binding and enforceable. Those who violate the provisions in it can be legally pursued in court. This will help you keep members accountable for their actions.
Better credibility among investors
If you want to raise funds for your LLC, your Operating Agreement will be a valuable tool. It contains all the information about your company, specifically its members and purposes. It also describes your accounting and management systems in great detail. These can help convince potential investors to put their trust in your LLC.
Simplifies your business
Your Operating Agreement helps simplify your business. It outlines the goals you need to focus on and provides you with the instructions you need to follow to achieve them. With an Operating Agreement in place, your business will have a clear direction, and its members won’t have to guess what to do in every situation.
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What Are The Limitations Of An Operating Agreement In Oklahoma?
While an Operating Agreement seems very beneficial, it should not in any way be considered the solution to all your company’s problems. The document has some limitations preventing it from doing certain things.
It does not have control over external factors
First, a well-written Operating Agreement might be able to handle most aspects of your business, but it won’t give you control over things that are out of your hands. For example, it can help you prepare for changes in supply and demand but can never control the supply chain itself. There are also other factors, such as Oklahoma’s aging workforce and the state’s personal income taxes.
It cannot prevent all disputes
Second, an Operating Agreement might be able to remove confusion with all of its guidelines, but it cannot prevent all misunderstandings and potential conflicts from arising within your LLC. Disputes can still arise during the regular course of business.
It is difficult to create
Finally, know that you will need to do a lot of research to learn about the best practices in your industry, then spend much time brainstorming and writing provisions covering all the aspects of your business. If the task becomes too challenging, you will end up paying lawyers to help you create the document for your LLC.
What Should You Include In An Oklahoma LLC Operating Agreement?
Your Operating Agreement must be comprehensive enough to cover all the bases when it comes to your business. It must contain all the information and guidelines necessary so your company becomes productive, is capable of solving internal problems, and is ready to face different situations.
That said, make sure that your Operating Agreement includes the following:
- Details identifying your LLC
- Your LLC’s purposes
- Information about your LLC’s membership
- Guidelines for membership concerns
- Management style
- Member roles and responsibilities
- Guidelines for meetings and voting
- Provisions limiting member liabilities
- Details about your accounting system
- Guidelines for handling profits and losses
- Guidelines for dispute resolution
- Instructions for dissolution
How To Form An Operating Agreement
Before creating your Operating Agreement, do some research on the best practices for LLCs in your industry, specifically in the state of Oklahoma. This will help you foresee potential issues that you might face when your LLC starts running. Additionally, carefully read the Oklahoma Limited Liability Company Act, study its provisions related to LLCs, and use these as the basis for your Operating Agreement.
You can tweak the guidelines to suit your needs, but make sure to stay within the boundaries of the state’s laws.
When you’re done with all that, you can proceed to draft your Operating Agreement. Follow our tips below if you’re creating it personally, and ask a lawyer to review the document when you’re finished.
Identifying your LLC
Start by providing information about your LLC, particularly its name and registered address. This will serve as proof that your company is the entity using your Operating Agreement. Make sure to specify the name and address of your registered agent as well since they will be interacting with the state of Oklahoma and receiving legal correspondence on your behalf.
State your LLC’s purposes
Next, specify your LLC’s purposes for existence. This will give your company a direction to follow and goals to strive for. Courts can order the dissolution of your LLC if it fails to move towards accomplishing its objectives, so make sure that your company does its best to achieve them.
Your LLC’s membership
In this section, you will need to provide information about your LLC’s members, particularly their names, addresses, the amount of capital contributions they gave to fund your company, and their respective interests. This serves as your proof of ownership over the business. The details here also serve to clarify the percentage of profits members receive.
Guidelines for membership concerns
After that, you will need to provide instructions for the various concerns related to your LLC’s membership. These guidelines should cover the addition of new members, transferring membership interests, and what to do when a member wants to withdraw from the company. In fact, specify the consequences of doing so.
Now, indicate how your LLC will be managed. This is important as the structure you choose determines the roles the members play. You have two options here:
- Member-managed: In this setup, the LLC will be operated by members who plan an active role in its daily activities. There is no need to hire a manager for the task. Members personally oversee the company’s operations and make decisions for it.
- Manager-managed: In this setup, the members select and appoint a manager who will oversee the company’s daily operations. They will be given full authority over the LLC’s activities, but major decisions affecting the business will be left to the members.
Member roles and responsibilities
Next, describe the roles and responsibilities the members of your LLC will have. If your LLC is manager-managed, specify the responsibilities of the managers appointed for the task. This will remove any confusion regarding responsibilities, limit the authority of the members/managers to their roles, and set proper expectations for everyone.
Guidelines for meetings and voting
Don’t forget to include guidelines for scheduling and conducting meetings and voting sessions, especially if your LLC is multi-membered. Meetings need to be held regularly to provide updates on your LLC’s progress. On the other hand, voting sessions need to be held as well so that members can participate in the company’s decision-making process. You need to provide instructions on how these can be scheduled and conducted.
Provisions limiting member liabilities
Include provisions describing the separation of your LLC from you and all co-members. This will formally limit your liabilities over your company’s debts and obligations. Courts will honor this part of your Operating Agreement and avoid ordering you to personally pay your LLC’s dues.
Details about your accounting system
After that, include a detailed description of your company’s accounting system. Indicate how your LLC monitors and records all financial transactions and provides reports to all members. Investors will look at this section to determine if your company can be trusted to handle finances with integrity.
Guidelines for handling profits and losses
Provide guidelines for the distribution of profits and losses among members. These are usually distributed according to interest percentages, but you can tweak that to your members’ preferences using an Operating Agreement. Be as detailed as possible to remove confusion and prevent disputes about this matter.
Guidelines for dispute resolution
Next, your Operating Agreement should include a set of guidelines allowing your LLC to effectively resolve internal conflicts. This will allow your company to be as productive as possible. The guidelines must be geared towards resolving disputes internally first—as in between affected parties—before seeking help from external mediators. If your LLC has a reliable dispute resolution mechanic in place, potential investors will take note of it.
Instructions for dissolution
There are many reasons why your company can be dissolved. Regardless of the cause, the dissolution process involves getting consent from all members, notifying suppliers, liquidating remaining assets, and then distributing the proceeds to members. Providing step-by-step instructions in your Operating Agreement helps your LLC close when necessary without leaving unpaid debts.
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 Oklahoma LLC Operating Agreement?
Operating Agreements in Oklahoma cost nothing if you prepare them yourself. There are no filing fees as well since the document is not required by the state. And while there are free Operating Agreement templates online, some websites can charge you up to around $200 for them. If you plan to hire lawyers to draft the document for you, prepare to spend up to $2,500 depending on the legal firm they belong to and the industry you operate in.
Frequently asked questions
No, the state of Oklahoma does not require LLCs to submit Operating Agreements. However, the document contains information and guidelines that could be critical to the success of your business. Doing business without an Operating Agreement can result in many problems.
Yes, but only if you included provisions for amendments and modifications to your Operating Agreement.
No, and yes. Operating Agreements remain valid until the LLC using them gets dissolved. However, they can also be rendered obsolete and useless if they become outdated due to a lack of updates.