1. Benefits of an Operating Agreement
2. Thorough Review
3. Organization
4. Management and Voting
5. Capital Contribution
6. Distributions
7. Changes to Membership Structure
8. Dissolution
9. Reasons for Creating an Operating Agreement
10. Preserving Limited Liability Status

The Iowa LLC operating agreement is a legal document agreed upon by member management that outlines the organization of a company's internal affairs, its standard operating procedures, and other essential aspects of the business.

This agreement is usually created to identify the LLC members and document their membership interest, i.e. what percentage of the LLC they own. The agreement also determines how taxes are paid and the overall management of the company.

Although it's not required to hold a certificate of ownership or file an operating agreement in the state of Iowa, businesses are strongly advised to develop and implement the document.

Unlike LLC formation documents, company owners do not need to mail the operating agreement to the state. It's an internal document and should be kept in the business's records. If the company doesn't have an operating agreement, LLC management can be held liable for financial compensation if faced with business failure or litigation.

Benefits of an Operating Agreement

The LLC operating agreement provides protection to member management by separating the personal assets and financial accounts of the members from those of the company. The operating agreement also facilitates tax benefits, which the LLC would not receive without the existence of the document.

The type of operating agreement to be drafted depends on whether your LLC is single-member or multi-member. An operating agreement for a multi-member LLC usually details procedures and policies regarding the relationship between members while a single-member LLC operating agreement is used to establish company policies, daily business reporting, and owner protections.

Thorough Review

All LLC members should critically review the agreement to determine if there is ambiguous or unclear language. If such language is found, members should contact a knowledgeable attorney for clarification.

Whether the company is a single- or multi-member LLC, its operating agreement must address specific areas. However, since they don't have the same requirements, the operating agreement should be adjusted depending on whether the LLC is single-member or multi-member.

Organization

The agreement should detail:

  • When the official formation of the LLC occurred.
  • Who the members are.
  • How ownership is divided among them.

Management and Voting

The agreement must state whether the affairs and day-to-day operations of the LLC will be managed by a member-appointed manager or by the members themselves. Although each member typically has one vote, the agreement can imbue one or more members with more voting power.

Capital Contribution

This captures the amount of financial investment of each member in the business. It also details the approach through which additional funds can be raised for the business.

Distributions

This details profit or loss sharing among members. Although the most common way is to distribute the profits evenly, a different way of sharing profits may be stipulated in the operating agreement.

Changes to Membership Structure

This covers the process of replacing or buying out an LLC member. It also details how ownership and roles will be transferred if a member leaves.

Dissolution

LLCs can be dissolved if the members decide to do so or when it becomes necessary. The operating agreement should speak to the hypothetical process of company dissolution.

Reasons for Creating an Operating Agreement

In Iowa, there are various reasons why an LLC should create an operating agreement.

According to Code Section 489.110 (Iowa Statutes), all LLCs may adopt operating agreements to govern their operating procedures. As such, creating an operating agreement for your LLC is recommended by the state.

Having an operating agreement prevents conflict among business partners (i.e. the members). Before starting a multi-member company, creating an LLC operating agreement will help prevent misunderstandings between members and set clear expectations on the responsibilities and roles of each partner.

Preserving Limited Liability Status

An operating agreement also helps preserve the limited liability status of the company. For single-member LLCs in Iowa, an operating agreement increases business credibility and helps to ensure that the owner's limited liability status is upheld in court.

Although it's a good idea to draft your company's operating agreement before filing the certificate of organization, you shouldn't wait until after the completion of the formation process. Some banks require LLCs to submit operating agreements before they can open a business bank account.

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