What Is An LLC Operating Agreement?
An LLC Operating Agreement is an internal document that contains the terms and conditions the owners (or members) of a Limited Liability Company have agreed to follow. The document serves to identify the business and its members, outlines the company’s goals, and provides instructions on how the LLC should operate. Even single-member LLCs usually have one.
Does Virginia require all LLCs to have an Operating Agreement?
Virginia does not require all LLCs to have an Operating Agreement. However, the state encourages Limited Liability Companies who want to run using personalized rules to create one and enforce it. The document may be used by both single-member and multi-member LLCs. It’s just that Virginia requires single-member LLCs to be run by a manager if an Operating Agreement will be enforced. This is because the document has to be signed by the sole member and another person who represents the LLC but is not a member of the company.
What Are The Advantages Of An Operating Agreement In Virginia?
An Operating Agreement gives Virginia LLCs certain advantages that shouldn’t be underestimated. Here’s a quick look:
Better control over your business
For one, an Operating Agreement lets the members of an LLC run their business according to their preferences and not just resort to the state’s default laws. To be more specific, the Virginia Limited Liability Act states the document can be used to “regulate or establish the affairs” of the LLC as long as its “provisions are not inconsistent with the laws of the Commonwealth” or the company’s own Articles of Incorporation.
Streamlined business operations
Your Operating Agreement outlines your LLC’s goals and purposes and also provides instructions on how your business operates. These details will help the members or managers of your LLC work better and become more productive. With the document in place, you won’t have to waste time guessing what to do in certain situations.
Advanced planning for succession
An Operating Agreement helps you prepare for succession in the future. This will help your LLC get through unwanted and unforeseen circumstances, such as the untimely passing of one of its members. To prevent the company from shutting down when this happens, inserting provisions for transferring the departed member’s interests will be necessary.
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What Are The Limitations Of An Operating Agreement In Virginia?
While your Operating Agreement allows you to do certain things, it has some limitations or downsides as well. Knowing them can help you maximize your use of the document. Here’s a quick look at the limitations of an Operating Agreement:
It’s difficult to create
An Operating Agreement has to contain provisions for every concern or process your business might have. To make sure that it covers all the bases, you will need to put in the time and effort needed to research the best practices and draft the content necessary for your business to function properly. And if you’re still unsure about your Operating Agreement’s comprehensiveness, you will need to pay a lawyer to have it checked, at least.
It doesn’t have control over external factors
An Operating Agreement gives you better control of your company’s internal processes. However, it does not have control over external factors such as the weather, the stock market, or the government’s mandates. These things are out of your hands, so to speak.
It needs to be updated frequently
Your VA LLC Operating Agreement grows with your business. Every change that happens to your company has to be reflected in your Operating Agreement. This means you will need to modify the provisions and/or contents of the document whenever a new member gets added, or a new set of guidelines is introduced, and so on. Failure to update the document can render it useless.
What Should You Include In A Virginia LLC Operating Agreement?
Your Operating Agreement has to contain all the necessary information about your company and its internal processes. This means you have to be as detailed as possible so that you can cover all the aspects of the business.
First, you will need to include details that can be used to identify the LLC, its members, and its purposes. Next, you will need to provide information about how the company will be managed, the roles of every member, and how the business limits its liabilities. Lastly, you will need to write down guidelines for specific processes such as dissolution.
How To Form An Operating Agreement
To form your own Operating Agreement, you must spend time researching the best practices in the industry your LLC belongs to. You must also ask others or read up on the potential issues that a business like yours might face so that you can prepare provisions for them.
You can start by reading the VA Limited Liability Company Act and use its provisions as the basis for what you will include in your Operating Agreement.
Details about your LLC
First, provide information about your LLC, particularly its name and registered business address. This proves that your company uses the document. Also include the name and address of your registered agent since the members and the courts should know who is the person that interacts with the state of Virginia on your behalf.
You also need to specify your company’s goals and set the direction for everyone to follow. Indicate when you plan to dissolve your LLC, if ever. Your company can be closed the moment it achieves its goals, so make sure to specify that.
After that, you must provide information about the members of your LLC, specifically their names and addresses. Indicate their capital contributions and interest percentages as well.
Management style and members’ roles
In this section, specify how your LLC has elected to be managed. There are two management structures, each with its own advantages and disadvantages.
- Member-managed LLCs are run by the members themselves. They handle all of the business operations and are heavily involved in the company’s decision-making process. What’s good about this structure is that the company’s owners personally know what’s happening in the business and can take action quickly. Single-member LLCs who want an Operating Agreement cannot select this structure because of Virginia’s rules.
- Manager-managed LLCs are run by people members appointed for the task. These managers are not members but are given the authority to make decisions for the company, particularly its daily operations. This setup frees members to delegate the tasks they want to be done to people hired for the job and allows them to make better decisions since they can look at the business from a different perspective.
After specifying your LLC’s management structure, provide a detailed description of the roles and responsibilities each member has. This sets expectations and places limits on the tasks and authority that they have.
Also, provide guidelines for concerns related to your LLC’s membership. These include instructions for adding new members, how to transfer membership interests, and guidelines for withdrawing from the LLC.
Limitation of liability and compensation
Include detailed provisions limiting the liabilities of members over the LLC’s obligations. This will protect the properties and belongings they own if the company gets sued for valid reasons such as negligence.
Don’t forget to indicate the method and frequency of profit distribution among members, as well as how they can be reimbursed when they spend personal funds on behalf of the company.
Lastly, include guidelines for dissolving your LLC when it becomes necessary. The dissolution process involves many steps, and failing to do it properly could result in unpaid debts and deficits in the distribution of profits among members. Specify instructions for liquidating remaining assets as well.
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 VA LLC Operating Agreement?
A VA LLC Operating Agreement technically costs nothing if you prepare it yourself. You can also find free online templates to help. If you find it too difficult and want to hire a lawyer for help, drafting may cost around $500 for a single-member LLC and up to $2,500 for a multi-member company.