What is an LLC Operating Agreement?

The operating agreement lays out the guidelines by which you want to run your business. It can cover a lot of ground and when every member of your LLC signs it, the operating agreement becomes a legally binding contract. It can, however, be amended in the future if the members decide that changes are needed.

Members agree to abide by the terms and conditions of the document. This can prevent internal conflicts that arise from misunderstanding or miscommunication. 

LLC operating agreements can be very detailed. They can include the tax structure of your LLC, how profits and losses are distributed, and the percentage of capital contribution of each member. When business operations are clarified in a legally binding agreement, you will have much better standing in court if there’s a disagreement with a business partner.

Another benefit of a business agreement is that it can protect the members from personal liability in lawsuits or company debts. 

Why is an Operating Agreement Important for Michigan LLCs?

There are several key benefits that a Michigan LLC can enjoy from having a business operating agreement.

Legal clarity

The operating agreement can be used in court to clarify that business affairs and the personal interests of an LLC’s members are separate. The agreement is also important if a business needs to prove its legitimacy in court.

Protecting members’ interests

After the operating agreement has been drafted and signed, each member knows their rights and obligations with the LLC. This will help prevent internal disputes and ensure that each member is treated fairly.

Business framework

The agreement provides the structure by which your business will be managed and run. This can keep your Michigan LLC more organized and efficient in its operations. 

Flexibility

If you don’t have an operating agreement, your LLC will still default to the jurisdiction of Michigan state laws. One-size-fits-all state laws may not be the best arrangement for your individual LLC. An operating agreement gives you the flexibility to run your business based on its needs and circumstances. 

With no operating agreement in place, management roles can become blurred. It can lead to internal disputes and business inefficiency unless those roles are spelled out. Financial matters related to profit sharing and fiscal responsibilities can default to state laws, which can risk financial chaos.

Another potential downside to having no business agreement is that it can open the personal assets of the LLC members up to legal liability. 

Key Components of a Michigan LLC Operating Agreement

Here are some of the most important components that can be included in your business agreement.

Ownership structure

This section can include the owners of the company (members), their ownership percentages, and any rights or responsibilities tied to ownership. 

Member roles and responsibilities

The agreement can clearly explain the rights, responsibilities, and management permissions of the LLC members and non-member managers. 

Voting rights and decisionmaking

In typical agreements, voting rights are apportioned based on the investment percentage of each LLC member. Members who invest a larger percentage get a larger say in how the business is run.

However, voting rights can be apportioned however the members see fit. Voting rights could be based on the duties and responsibilities of members, for example.

Profit and loss distribution

It’s a good idea to include a section that explains the equity distribution of the LLC in your operating agreement. Profits, losses, and distributions can be made proportional based on ownership percentages.

It can include all the members’ capital accounts, interests, and contributions, and explain how they share the profits and losses of the business.

Tax Considerations

The operating agreement can also define issues related to taxes. For example, who is responsible for filing the business taxes? Will passive losses affect the percentage investments of members? Are members liable for Michigan income tax if they contribute financially to the LLC?

Dissolution terms

This is also known as a “get-out clause.” It can be a good idea to include situations that warrant the dissolution of the LLC and how it would be carried out. You can include a provision for members to request involuntary dissolution in the event of illegal business activity.

This is not an exhaustive list. You may want to include provisions in your operating agreement to cover other situations. Examples would be the admission of new members, the death of a member, or defining the company’s intellectual property assets.

How to Create an LLC Operating Agreement in Michigan

You have two choices when it comes to drafting an LLC operating agreement in Michigan. You can do it yourself or you can hire an attorney to do it.

If you choose to write the agreement yourself, be as thorough as possible and include as many of the key sections listed above as necessary. You can also find a template to help write it or consult with other business professionals for advice.

Once the agreement is written, have all the members review it before signing. If any changes are necessary, make them before everyone signs the final document. You may want to have an attorney review the final document before everyone signs it. 

Michigan-Specific Considerations

There is no provision in Michigan state law that requires you to have an LLC operating agreement. The agreement is an internal company document that you don’t have to file with the state’s Department of Licensing and Regulatory Affairs (LARA).

One thing that’s important to remember is that while your operating agreement is a legally binding contract, it can still be changed if necessary. Members can vote to amend the document and sign the new version. 

Final Thoughts & Next Steps

An LLC operating agreement can provide structure and legal protection for your Michigan business and its members. Every member of your LLC will understand their rights and responsibilities as they’re explained in the agreement. It also keeps personal and business assets separate in the event of legal action.

Remember that the operating agreement is just one step in the process of forming your LLC. If you need help, contact an online LLC formation service to assist you with the process!

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