An LLC Operating Agreement is a critical document that outlines how your business will function and can help prevent major issues for your Maryland Limited Liability Company. Yet many business owners put it off because it involves making tough decisions about future scenarios.

In this post, we’ll explain why it’s worth making an effort to draft an operating agreement when forming an LLC in Maryland. From ownership and profit distribution to financial management and dissolution, this agreement helps ensure your business runs smoothly as it grows.

What is an LLC Operating Agreement?

An LLC operating agreement is a document that states how your operation runs, both at a high level and on a daily basis. In Maryland, it’s not required to write one, meaning the Secretary of State doesn’t need to see this document before they approve your business. However, the LLC operating agreement can be used as a legal document and can even override the default Maryland laws if need be. 

For example, if the default Maryland laws specify that profits be split according to investment values, you can use an operating agreement to show a judge that the intent was to split profits evenly. It’s important to map out your protocols now, even if they feel superfluous or otherwise irrelevant.

Why is an Operating Agreement Important for Maryland LLCs?

An operating agreement is a more formal term for business planning. Just like your business model specifies how you’ll make money and who your ideal audience is, your operating agreement talks about who’s involved with your business, how they’ll spend their days, and what you’re planning to do in different situations. 

A standard operating agreement covers the following:

• Owners: Whether your LLC was set up for a family business, online empire, brick-and-mortar store, or rental home, a Maryland operating agreement covers the ownership of the company. It may seem odd, but the Secretary of State doesn’t necessarily need your owner information on your formation paperwork, meaning you may need an operating agreement when you open a commercial checking account, go before a judge, etc. 
• Access: Who can see your financial records, or your customer’s personal information? Can they make changes to your documentation? These questions may seem straightforward at the beginning of your business, but if you grow, you’ll need to consider how information is distributed, accessed, and altered. Plus, you’ll need to think about which security controls (e.g., encryption, video surveillance, etc.) you’ll use to protect your documents. 
• Voting: Voting privileges will vary by company. While the default laws entitle all members to an equal vote, you can specify in your operating agreement that certain members will be granted additional voting rights. For example, you might make your CFO’s vote more powerful than the CEO’s vote on business expenditures that total more than $10,000. 

Business owners with hundreds of tasks on their plate can easily get tripped up by an operating agreement. In many cases, owners either gloss over important topics, leaving dozens of holes in the agreement, or get bogged down by the countless potential scenarios that could happen. This is why many businesses hire either an attorney or an LLC formation service to help them hammer out the specifics.

Key Components of a Maryland LLC Operating Agreement 

As you work through the operating agreement, make sure you answer the following questions:

• Who owns what?: Whether you’re referring to the profits, office chairs, patents, or intellectual property, you’ll need to make sure it’s clear who is the owner of each asset. If your LLC takes off, it’s easy for owners, investors, and employees to make assumptions about how everything will be distributed. With the right operating agreement, you can account for people’s contributions while still maintaining control over the spoils. 
• Who does what?: From opening the store in the mornings to dissolving your LLC in the case of a buy-out, you’ll need to consider who will be responsible for which tasks and, ideally, how they’ll carry out those tasks. For example, if you’re designating one party to turn in official company minutes every year, you might ask that they have an attorney review the minutes before officially submitting them to the state. 
• Who decides what?: This question is closely tied to the roles and responsibility section, but delves further into exactly how voting rights are distributed and who is in charge. For example, if you have a manager-managed company, where a manager assumes responsibility of day-to-day tasks while founders concentrate on expanding the business, you might give the manager full decision-making power on standard operations and then specify when the manager must consult the founders before moving forward. 
• Who earns what?: This is a question not just of salary but profit and loss distribution. While your personal assets may be protected in the case of financial loss, you’ll still need to consider how finances flow in lean and fat years alike. For example, a CEO might give up part of their official company salary to cover employee wages in the event of a disappointing fiscal quarter. 
• Who gets to end the company?: Company dissolution can happen for any number of reasons and, while you may not want to think about ending the company before it’s even begun, it does set you up for success in case it happens. For example, you might decide that all voting members of the LLC need to make a unanimous decision, as opposed to a simple majority of more than 50%. 

How to Create an LLC Operating Agreement in Maryland 

The best way to create an LLC operating agreement is to write down the framework, and then sketch out the details. We’ve covered some of the finer points above, but we’ll go into more detail below:

• Formatting: In Maryland, you can format the operating agreement however you wish. Some business owners may create a formal document with legal clauses and a table of contents. Others may keep a running Google Doc with key sections. No matter how you create yours, make sure it hits all the major points, is easy to interpret by another party (e.g., a judge, colleague, etc.), and that it’s protected by either physical or digital security barriers. 
• Bookkeeping: Deciding how you want the profit split at the end of a quarter is very different from day-to-day record-keeping. From CPAs to bookkeepers to managers, you’ll want to go over how the books are kept and what information needs to be recorded. For example, if you want to itemize every expense or use general categories. 
• Changes: As your business changes, your operating agreement needs to keep up. Unfortunately, this is an easy one to put on the backburner when you’re caught up in the throes of a business. The best thing you can do is designate a party to keep up with amendments, and of course, specify how you want the document changed and whether the changes need official approval from another party. 
• Access control: Passwords, key cards, vaults: however you choose to restrict access, you should detail these measures in the operating agreement. 

Maryland-Specific Considerations 

The state of Maryland, much like Delaware, appreciates the business owners in their state, and the law reflects this. That means you can expect to see some leniency in an array of matters, though it’s important not to take the state’s flexibility for granted. No matter what the situation is, whether it’s a lawsuit or a creditor complaint, your operating agreement should strive to be as comprehensive and fair to all those involved (including minority members, leaders, employees, customers, etc.). This can help you defend the company from frivolous or time-wasting matters if there are allegations against you.

Final Thoughts & Next Steps 

Operations are the lifeblood of your company. If you don’t have a clear plan, your company can head off in different directions faster than you think. If you don’t want to miss an important detail, consider how an attorney or LLC formation service can help you put your agreement together, so it’s as clear to you as it is to everyone else. 

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