What is an LLC Operating Agreement?

An LLC operating agreement is a legally binding understanding that lays out the government of a limited liability company. It specifies how the LLC will be managed. In Arkansas, it can be written, oral, or even implied. However, there are good reasons to sign a written agreement.

It names the members along with their ownership percentages. It defines roles, rights, and responsibilities. It documents whether and how new members can be added and what happens if a current member leaves. If the LLC is eventually dissolved, the agreement governs how that will take place.

It validates the company’s status as a legitimate LLC and asserts its right to the associated taxation and liability benefits. It provides evidence that the LLC is a legitimate, serious business. It’s typical for banks to require a written operating agreement before they will issue loans or even open a business account.

Why is an Operating Agreement Important for Arkansas LLCs?

Arkansas does not require that LLCs have an operating agreement, but it’s risky to do business without one. An operating agreement defines the structure and management of the Arkansas LLC. It makes clear the understanding between members about these things and guides the company in its daily conduct and in its resolution of disputes.

It legitimizes the LLC in the eyes of the State of Arkansas and the federal government. It makes it clear that the company is an LLC with the right to associated tax and liability benefits. It establishes credibility in the business community, particularly with banks and other potential lenders.

An operating agreement determines how disputes will be settled if they wind up in court. Courts will look to the agreement in making their judgments. If there is no operating agreement, the courts will settle a disagreement according to Arkansas law, even if the result is something most or all of the members didn’t want.

Even a single-member LLC should have an operating agreement. In addition to establishing legitimacy with governments and other businesses, it emphasizes the distinction between the member’s personal assets and the LLC assets. If there is a judgment against your LLC, it provides evidence that your personal assets are protected. Also, you can use it to define company succession when you no longer operate the LLC.

Key Components of an Arkansas LLC Operating Agreement

Since Arkansas does not require an LLC operating agreement, there is no standard list of what one must include. Here are some items you should consider as components of your operating agreement:

• Basic company details. These would include the LLC name, the fact that the company is an Arkansas LLC, the member names, the business purpose, the business address, and the expected duration of the LLC.
• Membership changes. The agreement should define what happens when a member wants to leave the company and transfer their interest. Usually, the other members will have the first opportunity to buy the departing member’s share. The agreement should define how the value of that share will be determined and paid. The agreement might also define the process by which the LLC may add new members.
• Dissolution. LLCs don’t last forever, and the agreement should state how the decision to dissolve will be made as well as the steps to effect that dissolution.
• Capital contributions. Each member contributes cash and possibly other assets to the LLC. The agreement documents what everyone put it and therefore what percentage their ownership interest is. You might also define the process by which members can make additional contributions.
• Distributions. The agreement should describe the process by which the LLC will decide how and when profits are to be distributed to the members.
• Management. This component defines how the business operates, makes decisions, and resolves disagreements. If defines the officers and their roles and responsibilities, and it states how they are chosen. It defines voting rights.
• Indemnification. An operating agreement will often provide indemnification for members who act in good faith.

How to Create an LLC Operating Agreement in Arkansas

An Arkansas LLC operating agreement can be oral, written, or implied, but every LLC should create a written agreement so that there is no question of what the understanding between members is. You can create an operating agreement by writing one that includes everything you deem important and signing it. However, the average entrepreneur may not think of every item that should be included in their operating agreement.

That’s why many LLCs turn to operating agreement templates offered by online LLC formation companies and other vendors. These can contain some boilerplate language and some space to fill in all the details that apply to your specific LLC.

Another option is to hire a business lawyer to create the agreement. LLCs that don’t hire an attorney may want to engage one to review their agreement before they sign it.

Arkansas-Specific Considerations

The Arkansas Uniform Limited Liability Company Act, effective in 2021, clarified the rules about Arkansas LLC operating agreements, and it contains a few aspects that are specific to Arkansas. It defines the operating agreement as “the agreement, whether or not referred to as an operating agreement and whether oral, implied, in a record, or in any combination thereof, of all the members of a limited liability company, including a sole member.”

The Act also recognizes pre-formation operating agreements. Agreements made before the company files its certificate of organization with the state are legally enforceable. These agreements will be binding on the LLC whether the company explicitly adopts them or not.

Final Thoughts & Next Steps

If you form an LLC in Arkansas, you should have an operating agreement, and it should be in writing and signed, even though the law requires neither of those. You need it to establish legitimacy with government entities and with business entities like banks and lenders. It lays out clear rules about business operations and dispute resolution that are explicit and understood by all members. It ensures that disputes that wind up in court will be resolved the way members agreed to resolve them, and not according to whatever Arkansas statutes the court applies.

An LLC operating agreement is a vital document, and it’s important not to leave anything out. One of the best ways to ensure everything is covered is to use an online LLC formation service. These services can provide templates and step-by-step guides on creating the kind of operating agreement your LLC needs. And that’s not all that LLC formation services do. They can help with every aspect of LLC start-up, including articles of organization, establishing your tax IDs, and appointing a registered agent. Some offer ongoing support like tax guidance, bookkeeping, and required state reporting. In summary, they can make sure that you don’t leave out any critical start-up tasks.

FAQ