Is it Time to Modify Your LLC Operating Agreement?

I recently wrote about the importance of creating an Operating Agreement for LLC’s (Limited Liability Companies). While no state actually requires an LLC to have an Operating Agreement, it’s an essential document for managing the company in the years ahead. The Operating Agreement is much like corporate bylaws: it sets the rules for how the company will be governed; it spells out how decisions are to be made and everyone’s roles and responsibilities. By doing so, it can help prevent conflict and misunderstandings among owners.

Whether you hastily drew up your Operating Agreement when you first launched your business, or you carefully reflected on every word with a lawyer, the fact is that any business evolves over its lifetime and situations will change. You need to make sure that your original Operating Agreement is continually updated to reflect these changes.

Changing Your LLC Operating Agreement

In this article, we’ll discuss when and how you should modify your LLC’s Operating Agreement. This is one of those administrative tasks that is great to knock out before the end of the year:

When do you need to modify an LLC’s Operating Agreement?

You need to amend your Operating Agreement any time there’s a change to your business arrangement, such as …

• A new member is added or a current member leaves
• The timing of the distributions changes
• You want to change the percentage allocation of the distributions
• You add more capital to the business
• You change your governance from member-managed to manager-managed (or vice versa)
• You make any other managerial/financial changes that are spelled out in the original Operating Agreement

How Do You Change Your Operating Agreement?

Amending your LLC’s Operating Agreement is a pretty straightforward task: members need to approve the change and then you need to document it. Amendments don’t need to be filed with the state; you just need to keep the amendment with your Operating Agreement as an internal document.

Vote On/Approve the Change

Your Operating Agreement may have spelled out the procedure for making changes. For example, the Operating Agreement might stipulate that unanimous consent of members (100 percent) is required to make a change, a super majority (e.g. two-thirds), or just a majority (over 50 percent). You’ll need to make sure you follow these rules; otherwise, your amendment won’t be valid and a member might sue.

If you didn’t define the procedure in your Operating Agreement, then you’ll need to follow the laws of the state. Some states require all members to approve the amendment, while other states just require a majority. You can check with your state’s Secretary of State office to find out the rules for your particular state.

Creating your amendment is simple. You’ll want a written document that states that it is modifying the existing Operating Agreement. Then, write out the entire amendment as clearly as possible… you don’t have to worry about making it sound “legal”; it’s more important that it’s easy to understand and there’s little to no room for misinterpretation. Be sure to refer specifically to the sections of the original agreement that you are amending. Have each member (or approving member) sign the amendment.

Again, you do not need to file this amendment with the state. Just keep it at your place of business along with your other official company documents.

In addition to amending your Operating Agreement from time to time, you may also need to amend your LLC’s Articles of Organization. This is the document you initially filed with the state to form your LLC. Some of the most common reasons to amend your Articles of Organization are if you officially change your LLC’s name, address, or registered agent.

Keeping your LLC documentation up to date is a simple task that can take just minutes to complete. It’s easy to overlook these administrative duties in the midst of running a growing business, but they’re important steps to staying compliant with the state, as well as avoiding any conflicts, even lawsuits, from members.

Operating Agreement Photo via Shutterstock

This article, "Is it Time to Modify Your LLC Operating Agreement?" was first published on Small Business Trends