What Is An LLC Operating Agreement?
An LLC Operating Agreement is an internal document that serves as a contract between the owners, called members, of a Limited Liability Company. It contains the terms and conditions, outlining how the company operates and how profits are shared. The document also acts as a manual, providing members and managers with guidance on how the company should be run.
Does Wisconsin require all LLCs to have an Operating Agreement?
The state of Wisconsin does not require LLCs to have an Operating Agreement. However, Chapter 183 of the Wisconsin Code, or the “Wisconsin Uniform Limited Liability Company Law,” encourages LLCs to have an Operating Agreement, whether orally or in writing.
What Are The Advantages Of An Operating Agreement In Wisconsin?
An Operating Agreement might be optional, but it is very beneficial to your company. Here’s a quick look at some of its advantages:
It removes confusion about internal processes
The guidelines and detailed instructions included in your Operating Agreement will help remove the confusion members may have about your company’s internal processes. This will prevent misunderstandings and disputes from happening. It also helps streamline the work inside your LLC.
It helps you convince investors to make an investment
Investors look for several reasons to invest in any company, such as achievable goals, a fast and high return on investment, and a reliable and trustworthy accounting system that can handle financial transactions with integrity. Your Operating Agreement can provide investors with this information, which can better help them make a decision.
It protects your personal assets from lawsuits
By formally separating the company from its members, an Operating Agreement can reinforce the limited liability status your LLC’s members have. As a result, courts will honor your Operating Agreement even if they are not stamped by the state.
It allows you to override Wisconsin’s default laws for LLCs
Lastly, an Operating Agreement allows you to override Wisconsin’s default laws governing LLCs as long as you don’t go against the state’s existing rules according to Chapter 183 of the Wisconsin Code.
For example, the state code indicates that in a member-managed LLC, decisions affecting the company can only be made when members representing more than 50% of interests give their approval. You can change this requirement via your Operating Agreement.
Create a customized operating
What Are The Limitations Of An Operating Agreement In Wisconsin?
Operating Agreements have many benefits, but they have some limitations as well. Here’s a quick look at them:
They do not have control over everything
While an Operating Agreement contains provisions and guidelines for most concerns, it does not have control over things such as the stock market, weather conditions, rival companies, and government mandates. These external factors can affect your business negatively and even cause problems.
They cannot remove certain liabilities
An Operating Agreement helps reinforce an LLC member’s limited liability status, but it cannot completely remove their liabilities if they are found guilty. According to the Wisconsin Uniform Limited Liability Company Law, members who do the following cannot be exonerated from liability for conduct:
- Members who violate criminal law
- Members who make transactions for unlawful gain
- Members who commit willful misconduct
- Members who deal unfairly with other members, particularly over issues where they have a conflict of interests
They can still be violated
A comprehensive Operating Agreement can be used to hold members accountable for their actions. However, since it is an internal document, it can still be violated. This is especially true for Operating Agreements that are poorly written.
What Should You Include In A Wisconsin LLC Operating Agreement?
Your Operating Agreement has to contain enough information and guidance to cover all the bases regarding your company. For example, your Operating Agreement has to at least include the following:
- Details identifying your LLC and its members
- Business purposes
- Guidelines for membership concerns
- Management style
- Roles and responsibilities
- Voting rights
- Profit and loss distribution
- Accounting system
- Liability limitation provisions
- Dispute resolution guidelines
- Amendments and severability
How To Form An Operating Agreement
Forming your customized Operating Agreement takes effort. You can read the Wisconsin Uniform Limited Liability Company Law and use its contents as a basis for your Operating Agreement, then customize some details according to your preferences. That way, you avoid inserting provisions that are contrary to law.
Details identifying your LLC and its members
Start by providing information about your LLC and its members. Specifically include the following:
- Your LLC’s name and registered business address
- Your registered agent’s name and address
- The names and addresses of each member of your LLC
- The capital contributions and interest percentages of each member
These details serve as proof of ownership of the LLC. These also provide courts with information about the people involved in the company, including the person acting as your representative when interacting with the state.
Indicate your LLC’s reasons for existence. These will serve as your company’s mission and vision and will be the goals you strive for. Be as detailed as possible. Courts will look at this part to determine if your business really aims to reach these goals or if it should be closed if worse comes to worse.
Guidelines for membership concerns
Your Operating Agreement must contain instructions for every membership concern your LLC might have. These include guidelines for adding new members, transferring membership interests, and withdrawing from the company. Make sure to indicate the consequences of withdrawing from your LLC as well.
Specify the management structure your LLC has elected to adopt. There are two types to choose from: member-managed, where members are the ones personally running the business, and manager-managed, where the members have taken a step back and entrusted the business operations to an appointed manager. Both types have their advantages and disadvantages.
For example, member-managed lets you handle the business yourself, allowing you to see what’s happening in real time. On the other hand, a manager-managed company can delegate more menial tasks to other people. Wisconsin state laws indicate that your LLC will be managed by its members unless specified in the Operating Agreement.
Roles and responsibilities
In this section, you must provide detailed descriptions of the roles and responsibilities every member of your LLC may have. This limits members’ authority to what has been assigned to them. It also sets expectations and minimizes risks of disputes and other conflicts from happening.
Profit, loss, and compensation
Your Operating Agreement must indicate in detail how and when the members of the LLC will be compensated. Provisions for reimbursement of those who use personal funds for the sake of the business must also be included.
Also, include how the LLC divides profits and losses among all members. These are usually distributed according to interest percentages, but you can tweak the shares using your Operating Agreement. Providing clear guidelines in this matter helps prevent financial disputes down the line.
Dispute resolution guidelines
In case disputes do happen, include provisions for it, too. For instance, you can indicate that both parties must prioritize solving problems between themselves before involving the company. You can even prevent outsiders from meddling. There is no one guideline that can help every LLC, so this part is up to you to write.
Amendments and severability
Amendments are meant to update existing provisions so they are up-to-date and reflect the changes your LLC faces. On the other hand, severability refers to a clause allowing you to remove provisions that have been found illegal or unenforceable by the court. Thus, it should be included in your Operating Agreement so that it can stay useful and relevant to your company.
Lastly, include guidelines for dissolving the LLC. These must include reasons for your company to be dissolved, followed by step-by-step instructions to properly close your company. The state has default rules for dissolution, but inserting specific provisions here means being able to adjust certain things, like the distribution of liquidated assets to members prior to closure.
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.
Create a customized operating
How Much Is A Wisconsin LLC Operating Agreement?
The amount of funds you spend to create an Operating Agreement varies. It absolutely costs nothing if you personally create one for your company. You will need to spend a lot of resources to make sure that your document is foolproof and devoid of loopholes.
But if you want to take it easy, or it has become difficult for you, hire a lawyer for help. The amount you need to pay depends on the task, but prepare to spend up to $700 for their professional assistance.
Frequently asked questions
The state of Wisconsin does not require single-member LLCs to have Operating Agreements. You can run your business without it, but you can’t enjoy the advantages that come with the document. Create an Operating Agreement even if you’re the sole member of your LLC.
No. The state of Wisconsin has no need for your Operating Agreement. It’s an internal document. Just create duplicate copies, have them signed by all the members, and give them a copy after as a reminder.
Yes, but only if you’ve included a provision to allow amendments and modifications to your Operating Agreement. All proposed changes must then be approved by a majority of the current members to be included in the Operating Agreement. If you’re a sole owner, this part’s a non-issue, of course.