How to Create an LLC Operating Agreement in Alabama

An operating agreement isn’t required in Alabama, but it’s highly recommended. This internal document outlines how your LLC will function, from ownership and voting rights to profit distribution and dispute resolution. Whether you’re a solo entrepreneur or working with partners, having a clear agreement in place can help protect your business and prevent misunderstandings.

A big part of starting any new business is ensuring that you’re building a strong foundation from which to launch your new enterprise. One essential component of this foundation is business paperwork, which must be filed with your state to make your entity legal. When you create an LLC in Alabama, you should already be familiar with the Articles of Organization; however, another critical document is the operating agreement. 

Although operating agreements are generally not required by law when creating an LLC, they are hugely beneficial for your business. This document provides detailed information regarding how your company will run, including the roles and responsibilities of founding members, as well as profit and loss distribution. 

While you could create an operating agreement yourself, it’s a relatively complex and legally binding document. So, it’s best to understand what should be included and utilize professional help whenever possible. Here’s everything you need to know about drafting an Alabama LLC operating agreement. 

What is an LLC operating agreement?

The primary purpose of an LLC operating agreement is to outline each specific component of running your business. The more detailed this document is, the easier it is to settle disputes or disagreements among members and/or business managers. Essentially, this agreement outlines how your company will operate, both day-to-day and at the ownership level, including voting on major decisions or changes to the LLC. 

The secondary purpose of an operating agreement is to protect each member within the organization. Because all aspects of the business are clearly defined and the agreement is legally binding, members can potentially avoid costly lawsuits and other disputes that may arise from misunderstandings or improper procedures. 

Why is an operating agreement important for Alabama LLCs?

The main reason an operating agreement is important for Alabama LLCs is that it eliminates confusion or ambiguity within the company. All members know and understand how the business will operate and what to do if someone wants to make any fundamental changes to the LLC. For example, if a member wants to leave or dissolve the business, the operating agreement can outline the proper steps to take to make it happen. 

Without an agreement, legal disputes and conflicts are more likely to occur, which can disrupt operations or even derail your LLC altogether. The other downside is that, in the event of a lawsuit, the rules and regulations default to the state. Because the state is impartial, it may not make the best decision for your business. 

Key components of an Alabama LLC operating agreement

Your business is unique, and you should include as many details as possible regarding how your company will operate (now and into the future). That said, here are some core components to include and discuss with founding members when drafting your operating agreement. 

Ownership structure

Generally, ownership structure is defined by percentages. However, it’s up to you to determine how much of your business each member owns. Perhaps it’s defined by capital investment, or maybe it’s defined by roles and responsibilities. Your agreement should also outline how this structure can change and what would cause such a shift in percentages. For example, if one member invests more into expanding your business, does their ownership share change accordingly? 

Member roles and responsibilities

Some members may be involved with day-to-day activities, while others may prefer to be silent partners. Not only should your operating agreement outline who is responsible for what, but it should detail the hierarchy within the business. Does one member outrank others when overseeing specific duties? What is the chain of command when there’s a problem with the business? 

Voting rights and decision-making

As a rule, all LLC members should be involved in deciding what happens to the company, even if they’re not involved in daily operations. That said, some members may have more influence over voting and decision-making. For example, a member may have veto power to overrule the votes of others. Your operating agreement should outline the voting process, including when to hold a vote, how to hold it, and how to break ties if they occur. 

Profit and loss distribution

Typically, profits and losses are distributed based on the ownership structure; however, you may opt for a different method for your LLC. Although members should be protected from any business liabilities or debts, it can be beneficial to claim losses for tax purposes. Your agreement should outline how profits are distributed and who can claim losses if or when they occur. 

Dissolution terms

Dissolving your LLC is a formal declaration that must be submitted to the Alabama Secretary of State. However, you need to detail the factors and procedures that can lead to dissolution. For example, do all members have to agree to dissolve the business? What about asset distribution? Also, keep in mind that you may choose to dissolve your LLC without shuttering your business. One example might be a founding member leaving the organization, so it makes sense to create a new LLC rather than operate under the original Articles of Organization. 

How to create an LLC operating agreement in Alabama

Once you know all the specific elements to include in your operating agreement, you can find templates online and start drafting the document. However, in most cases, it’s best to outsource this process to a third-party LLC formation service. 

• First, outsourcing ensures you don’t forget any details within the agreement. A consultant may also be able to provide insight into how to phrase different aspects of the agreement to avoid legal ambiguity or confusion. 
• Second, utilizing a third party can eliminate any suggestion of bias or a conflict of interest. If one member is in charge of creating the agreement, they may not have the best interests of everyone else in mind.

Alabama-specific considerations

Alabama is one of several states that allows LLCs to form a “series” of businesses under one umbrella. With a series LLC, you can create individual entities underneath the primary LLC, each with its own liability protection, members, and managers. Not all businesses work well with this type of LLC, but it can offer some unique advantages. 

Unlike a traditional LLC, if you want to form a series LLC in Alabama, you will need to file an operating agreement with the umbrella LLC’s paperwork. Because series LLCs are much more complicated, it’s best to consult with an LLC formation service to ensure you draft your agreement correctly.  

Final thoughts and next steps

Overall, an operating agreement is such a valuable document that it makes sense to work with an LLC formation service like Tailor Brands. Not only can we help you with your agreement, but we can also act as your registered agent in Alabama. Let us take care of the paperwork and minute details of your business so you can focus on more important matters. 

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