Amendment To LLC Operating Agreement: Everything You Need to Know
An amendment to LLC operating agreement can be made when a Limited Liability Company (LLC) wants to change something about the structure or operations of the company.3 min read
What Is an LLC Operating Agreement
Operating agreements are formed by the members (or owners) of an LLC in order to clearly define the rights and responsibilities of each member within the company. This document should also outline exactly how the company will make big decisions (voting processes) and the plans for profit distribution.
Basically the rules or guidelines for how the company will function as a business entity are laid out in the operating agreement.
What exactly will be written in the document depends on your particular company's needs and the desires of the members. Usually issues like the admission of new members, resignation of members, voting percentages, and the handling of profits are all covered in the operating agreement.
Percentages of ownership should be clearly spelled out in the document. The business structure of an LLC actually allows more leeway than other structures when it comes to ownership and profit distribution. Members may not receive revenue that matches the percentage of their initial buy-in, but sometimes LLCs decide to distribute profits based on management roles and other factors.
The operating agreement should also define how the shares of a deceased member will be handled.
There is no need to submit an operating agreement to any agency, but it should be kept within the company and referred to for all decisions, formal meetings, and so on.
The original owners (also known as founding members) of the LLC should agree on and sign the document. These signatures signify agreement and act as a contract between the members to uphold the stipulations of the agreement.
There are a few rules when it comes to operating agreements:
- They cannot break any laws (state or federal).
- They cannot allow for profit distributions that would prevent the company from paying debts.
- The document, once formed, governs the affairs of the company.
Any amendments made to the document must also abide by state laws and the other rules regarding operating agreements.
Benefits of an LLC Operating Agreement
Although most states do not require LLCs to create operating agreements, they have many benefits and prove to be a vital part of beginning a healthy business.
When the expectations of all members are clearly spelled out and agreed upon, the potential for future disputes is greatly lessened. Having the treatment of all members documented also helps avoid lawsuits regarding unequal treatment of LLC members.
Rules for voting, especially when it comes to amendments should be included in the operating agreement, and will help handle any big decisions the company faces.
States usually have a set of provisions laid out for companies to follow in the case that an operating agreement doesn't exist, but this takes away from the freedom owners are afforded to do things the way they prefer.
What Is an Amendment to LLC Operating Agreement
Amendments to operating agreements must be filed with the original document and specify which part of the agreement is meant to be changed, removed, or added to.
Operating agreements and articles of organization are usually written by the founding members of an LLC when the company is first registered with the state and begins conducting business. Any major changes to the business should be filed with these documents.
The original operating agreement should stipulate if amendments are allowed and exactly how the process should be handled.
Sometimes companies decide that amendments can only happen when all members are in full agreement or only within the first year of the company's life. Certain other rules may be in place like specific time frames for amendments or voting requirements (like a two-thirds or majority vote).
If any of the regulations laid out in the original agreement are violated during the amendment process, the amendment is not legal and therefore will not hold up in court.
The state in which the company is formed likely has rules for operating agreement amendments if the original document does not address this issue.
Once amendments are agreed upon by the required amount of members and properly handled, they'll be kept with the original document for future reference.
If major changes need to be made throughout the original operating agreement, it might be better to rewrite the entire document if all members are in agreement.
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