What is an LLC Operating Agreement?
If you are forming or operating a Limited Liability Company (LLC) in Minnesota, one of the foundational steps is establishing an operating agreement. But what exactly is this agreement, and how does it legally impact your business?
Under the Minnesota Revised Uniform Limited Liability Company Act, an operating agreement is a contract among all the members (owners) of an LLC that governs the internal operations of the business. Think of an operating agreement as the central rulebook for your business that dictates how major decisions are made, and how the relationships between the members are governed.
An Operating Agreement typically covers crucial details such as:
Management Structure: Whether the company is managed by all the members, appointed managers, or a board of governors.
Voting Rights & Profit Sharing: How voting power is allocated and how profits and losses are distributed among the owners.
Buy-Sell Provisions: What happens if an owner dies, becomes disabled, or simply wants to sell their share of the business.
Dispute Resolution: How deadlocks are broken if the owners cannot agree on a major decision.
Under Minnesota law, an operating agreement can be oral, implied, written, or any combination of these formats. So, strictly speaking, the state of Minnesota does not require you to sign a formal, written document to legitimize your business. However, not having a written agreement has risks.
Some reasons to have a written operating agreement:
Without a written agreement, the statutory default rules automatically apply, which may not align with your preferences. A written agreement allows you to decide how the company is run.
Putting your agreement in writing clearly establishes the expectations of everyone involved, which can prevent costly disputes. Operating agreements outline roles, responsibilities, and procedures which can prevent misunderstandings that can lead to litigation.
Financial Institutions may require a written agreement in order to open a bank account or obtain a loan. Banks want to verify the entity's legitimacy, management structure, and confirm who is authorized to sign on behalf of the company.
A written operating agreement is the best way to protect your investment, tailor the rules to fit your specific business needs, and ensure that all owners are on the same page from day one.