5 Reasons to Create an Operating Agreement for your LLC

While Michigan law does not require limited liability companies to have an Operating Agreement, the Operating Agreement is important because it sets forth the rules for operating your Michigan limited liability company (“LLC”). An LLC is formed in Michigan by an organizer filing the Articles of Organization (the “Articles”) with the Michigan Department of Licensing and Regulatory Affairs (“LARA”). The organizer may or may not be a member of the LLC. The LLC is owned by its members. The members also manage the LLC unless the Articles or the Operating Agreement provide otherwise. The Operating Agreement is not filed with LARA. Without an Operating Agreement, the LLC is governed by the Michigan Limited Liability Company Act (“LLCA”). The Operating Agreement may modify or override certain provisions of LLCA. Reasons to create an Operating Agreement for your LLC include providing specificity for the following:

  1. Limited Liability: One of the main purposes of an LLC is to provide limited liability for its members. The Operating Agreement is a place to identify the members of the LLC and how the LLC will operate. Even for LLCs owned by a single member, having an Operating Agreement lends credibility to your LLC’s separate existence.
  2. Ownership: The Operating Agreement allows you to identify the members or owners of the LLC, their financial contributions to the LLC and their percentage interests in the LLC. The Operating Agreement may allocate how LLC profits and losses will be allocated based on each member’s investment and other contributions to the LLC’s business. In addition to defining each owner’s share, the Operating Agreement should identify when distributions of profits will be made and any restrictions on distributions.
  3. Management: By default, the LLC is managed by its members unless the organizer specifically identifies that the LLC will be managed by a manager. The Operating Agreement can identify who will manage the LLC, and each manager’s respective rights and responsibilities.
  4. Transitions of Ownership: The LLCA provides that a member may not resign or otherwise withdraw from an LLC except in accordance with a provision in the LLC’s Operating Agreement. The Operating Agreement should therefore include a “buy-sell” provision which establishes a framework for a member who wants to sell his interest, dies or becomes disabled. The buy-sell provision should outline how value will be determined and who may buy the member’s interest. The Operating Agreement can also provide for circumstances under which an LLC member may be expelled from the LLC.
  5. Management Plan for LLC: While many management decisions are made informally, the Operating Agreement should identify what decisions require a vote of the members and how the voting power will be split among LLC members. In addition, if the members are deadlocked on an issue, the Operating Agreement can provide for a means for resolving the deadlock.

In addition to the items above, LLC members may wish to cover additional issues in an Operating Agreement such as how to keep books and records, non-compete provisions, use of insurance and right to an accounting, among other matters. In conclusion, if you are a member of an LLC and do not have an Operating Agreement, consider creating an Operating Agreement that conforms with Michigan law in order to avoid disputes and protect your investment in your LLC.