What Is An LLC Operating Agreement?
An Operating Agreement is an internal document that provides LLCs with the necessary information to function properly. It contains the rules and regulations the owners, called members, have agreed to follow. The document also provides guidelines for every internal process involved in the business.
Does Utah require all LLCs to have an Operating Agreement?
According to the Utah Revised Uniform Limited Liability Company Act, the state does not require Utah LLCs to have an Operating Agreement. However, the government does encourage you to have one. After all, the document allows such businesses to have greater flexibility with regard to their operations and the relationship between each member.
What Are The Advantages Of An Operating Agreement In Utah?
An Operating Agreement gives LLCs certain advantages that make doing business easier and more profitable. Here’s a quick look at them:
Protection for personal assets
Your Operating Agreement helps protect your personal property and belongings from being used as payment for your LLC’s obligations. This is because it formally separates you from your company. Courts will honor this document when your company is sued for valid reasons and loses the case.
Better control over your company operations
Without an Operating Agreement, your company will be governed by Utah’s default laws for LLCs. While this won’t put your business at a disadvantage, being able to run your company according to your preferences will make things easier for you. You also gain more control over your daily operations and other aspects of your business.
Improved credibility among investors
Investors normally look for companies that promise quick and high returns as a result of having attainable goals and a reliable and trustworthy accounting and management system. They will read your Operating Agreement to check if your company possesses these qualities—and might decide to invest in your LLC.
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What Are The Limitations Of An Operating Agreement In Utah?
While an Operating Agreement gives your LLC many benefits, it is by no means an all-around solution to all your needs. It also has limitations, such as:
It cannot control everything that affects your business
An Operating Agreement has no control over external factors or unforeseen circumstances that your company may face. These include things like fluctuations in the stock market, problems in the supply chain, and more. The most the document can do for you is to help you prepare for situations that could happen as a result of these factors.
It is not easy to make
Creating a comprehensive Operating Agreement that covers all of the aspects of your business requires a lot of effort. You have to read up on the best practices in your industry and brainstorm (with your co-members, if any) so you can write provisions for almost every possible scenario you will face. If you don’t know what to include in your document, you will most likely spend funds to hire a lawyer to help you as well.
What Should You Include In A Utah LLC Operating Agreement?
Your Operating Agreement must include all necessary details pertaining to your business. This means it should contain information about your LLC, its members, its purposes, and the guidelines that must be followed so it can attain its goals. You must also include instructions for adding members, transferring membership interests, handling disputes, and closing the LLC when necessary.
How To Form An Operating Agreement
Before creating your Utah LLC Operating Agreement, make sure to read the state’s Revised Uniform Limited Liability Company Act. You can use this as a basis for the provisions you will insert into your Operating Agreement, and only tweak those you want to customize to suit your needs.
After that, you can proceed to create the document. You can start by following our tips below, then ask a lawyer to review it for loopholes and revisions.
Information about your LLC
First, provide information about your LLC, particularly its name and address. Include the name and address of your registered agent as well. This part is very important because it establishes that the document is used by your company and tells the state to whom they will need to send correspondence.
Next, provide information about all of your LLC’s members, including their names, addresses, capital contributions, and interest percentages. This section will serve as everyone’s proof of ownership in the company and will be used whenever courts need to verify it.
Make sure to include guidelines regarding adding new members, transferring interests, and membership withdrawals. Doing this will help you if you plan to sell your company in the future or if you want to transfer interests to new members.
In this section, you must specify how your LLC will be managed. It can be run by members or by managers appointed for the task. You must indicate your management structure because it will determine what kind of tasks will be assigned to the members of your company.
You must then provide a detailed description of the roles and responsibilities the members of your company will have. This sets expectations on what they will do for your business and limits their authority to whatever was assigned to them.
Meetings and voting requirements
Your LLC’s members need to meet from time to time to discuss things pertaining to your business. For this, you will need to create guidelines on how meetings can be scheduled and conducted. The guidelines must also cover how to notify members about meetings, what to do in case some are not available to attend, and how to record these meetings so everyone can be given copies.
Distribution of profits and losses
Your Operating Agreement must include detailed guidelines on the distribution of profits and losses among members of your company. These are normally distributed according to interest percentages, but you can change this according to your preferences with an Operating Agreement. The guidelines you provide here must also specify the method and frequency of distribution so everyone knows how and when they will receive their income.
Your Operating Agreement must include provisions describing the separation of your LLC from you and its other members. Courts will look at this part of your Operating Agreement if ever your business gets sued.
Next, you should include guidelines for solving problems that arise in your business. This will help you deal with disputes that tend to happen over time. The instructions written here should aim to solve the problems internally at first and must consider welcoming external mediation only after initial attempts to resolve things fail.
Amendments and modifications
Insert provisions allowing changes to be made to your Operating Agreement. Doing this will let you keep updating the document to accurately reflect the changes in your LLC and stay relevant. An outdated version of your Operating Agreement might not help you, especially if your industry requires you to pivot or when internal disputes arise.
There are several reasons why your business may close, including the untimely departure of a member, or a court order mandating its dissolution. As such, your Operating Agreement must contain instructions for dissolving your LLC as a precautionary measure. Providing step-by-step instructions for your LLC’s closure will help you settle any outstanding debts and distribute the remaining assets to 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 Utah LLC Operating Agreement?
An Operating Agreement in Utah is technically free as long as you create it by yourself. There are no filing fees associated with it as well, either, since the state does not require it. But if you hire a lawyer to help you write the document, be prepared to pay up to around $2,500, depending on the task you give them and the size of your LLC.
Frequently asked questions
No, if we are talking about being used as a document to form a business entity. The state of Utah does not require LLCs to have an Operating Agreement to register. However, single-member LLCs will benefit much from having one in place. The document can serve as proof of the sole member’s ownership of their LLC, help them secure their personal properties, and attract investors when they need funding.
Yes, as long as you have included provisions allowing amendments and modifications to your Operating Agreement.