The formation of a new Indiana LLC is an exciting process that involves multiple essential steps. However, it’s important not to simply handle the documentation required by the state and call it a day. Indiana does not require you to craft an official LLC operating agreement, but that doesn’t make having one any less important.

What Is an LLC Operating Agreement?

An LLC operating agreement is a legal document that clarifies and outlines various aspects of a business’s internal functionality. Among other things, it formalizes the company’s ownership structure and covers daily operational procedures. It also outlines details regarding profit sharing, debt management, and how future changes to the business will be handled.

In other words, an LLC operating agreement is like an owner’s manual for your company. Having one prevents future confusion and disputes by setting airtight, mutually agreed-upon expectations right from day one. It also helps protect your company from legal liability, making it essential even for single-member LLCs.

Why Is an Operating Agreement Important for Indiana LLCs?

Some new business owners assume that since Indiana doesn’t require LLCs to create an operating agreement and keep one on file, it isn’t worth worrying about. But skipping it can lead to serious headaches down the line, especially as your business continues to grow and evolve. Here’s a closer look at why it’s important not to overlook this crucial document.

Clarifies roles and ownership

Operating agreements cover in detail which members own what, how much each contributed to the company’s startup costs, and what their distinct duties are. This makes them especially important for multi-member LLCs, as it prevents disagreements over these matters in the future.

Preserves limited liability

One of the primary benefits of forming an LLC in the first place is the opportunity it gives you to protect your personal assets and separate them from those of your business. Creating an official operating agreement further formalizes this separation, making it easier to protect yourself from personal liability in the future.

Overrides default state rules

Without an operating agreement in place, your company is instead governed by Indiana’s default rules, as dictated by the Indiana Business Flexibility Act. This may or may not align with your unique goals for your business or its function.

For example, without a custom-crafted agreement document, profits may need to be split equally among LLC members, even if one or two in particular contributed much more.

Required by most banks and investors

Before allowing you to open a business account, most banks will want to see a copy of your company’s operating agreement. The same goes for serious investors. People expect to see and evaluate the details of how a company is run before agreeing to a partnership.

Key Components of an Indiana LLC Operating Agreement

Strong Indiana LLC operating agreements don’t need to be complex to be effective. However, they do need to be thorough and adequately cover all the bases of how a company will operate. Here are some standard components you’ll want to be sure to include.

Ownership structure

This section clearly outlines each company member’s ownership percentage, as well as how those percentages were determined. Many companies choose to do this according to capital contributions or overall time commitments to company duties, but it’s ultimately up to you.

Member roles and responsibilities

Determine whether your emerging LLC will be run by managers or members. Then assign clear, specific duties and responsibilities to each person. Moving forward, this keeps everyone clear on what their day-to-day responsibilities are.

Voting rights and decision-making

This section will cover how you’ll address important decisions for your company. Will a member’s voting power correlate to their ownership percentage? Do you want major decisions to require unanimous agreement, or is a majority agreement sufficient?

Profit and loss distribution

Include details that cover how profits and losses will be distributed among members. This is critical not only for daily legal clarity but also for future tax reporting purposes.

Meetings and procedures

How often will your new LLC hold meetings moving forward, and who is required to attend? You’ll also need to decide how decisions made will be recorded moving forward.

Membership changes

Include information on how members will be added or removed in the future. Be sure to cover factors like valuation methods and buyout procedures. This will help keep your LLC on stable ground even in the face of major changes to its core team.

Dissolution terms

What’s the procedure going to be if you decide to dissolve your LLC one day? How will the remaining assets and debts be distributed among its members?

Indemnification clauses

Don’t forget to include language that protects your company’s members and managers from personal liability, in case any legal issues ever arise.

How to Create an LLC Operating Agreement in Indiana

Although drafting an LLC operating agreement may sound complicated, it’s fairly approachable with the right tools, guidance, and resources in your corner. The key is to be thorough and make sure you’re truly clarifying everything you need to.

1. Consider starting with a template

If drafting the agreement yourself, a template gives you a good foundation to start with. You can also consider reaching out to a professional LLC formation source (like Tailor Brands) for assistance and helpful tools.

2. Tailor the details to fit

If using a template, fine-tune the details to correlate with your company’s. Examples you’ll need to specify include (but aren’t necessarily limited to) the number of members, management style, and how profits will be split.

3. Review Indiana state law

Even though Indiana doesn’t require LLCs to have operating agreements in place, it’s still important to make sure yours aligns with the law. Consult relevant sections of Indiana Code § 23-18 to confirm your agreement doesn’t include any contradictions.

4. Finalize and sign the document

Once your document is thoroughly drafted, each member needs an opportunity to read it, consult with a professional if desired, and agree to the terms. Once this happens, all members must sign the agreement and retain copies for their records. (This step is important even for single-member LLCs.)

5. Store your copies securely

Your Indiana LLC operating agreement is an important document and should be carefully stored along with other documents of its kind. You don’t need to file it with the state, but you should ensure it’s handy when applying for loans, resolving internal issues, opening accounts, etc.

Indiana-Specific Considerations

When drafting any legal document, even one not required by the state, it’s still important to consider state-specific laws and restrictions. Here are a few to keep in mind in Indiana.

Not legally required, but courts will expect to see it

The Indiana Secretary of State doesn’t require your company to have an LLC operating agreement. However, courts will likely expect to see one if a legal dispute ever develops. Having one can definitely support your position.

Equal default profit splits

As many states do, Indiana dictates equal division of profits and losses in the absence of an operating agreement. If this isn’t how you want to handle this aspect of running your business, an LLC operating agreement is critical.

Single-member LLCs need one, too

In Indiana, a single-member LLC still benefits from having an operating agreement in place, especially in the face of potential legal issues. Plus, most Indiana banks and investors will still want to see one, even if you run your business solo.

Amendments need to be documented

Indiana doesn’t require LLCs to file their operating agreements if they have them. But you’ll still need to formally document any changes and keep current versions with your records, in case they’re needed.

LLC Operating Agreements Provide Structure and Clarity

No one planning on forming an LLC in Indiana should write operating agreements off as a mere formality. They provide important legal protection and foundational structure that new businesses need to reach their full potential.

Not sure where to start? Tailor Brands can simplify the process of forming your Indiana LLC and crafting a solid operating agreement. Reach out today, and let us know how we can help.

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