As far as business entities go, an LLC is one of the easiest and most secure options for companies of all sizes. As you form an LLC in Minnesota, you’ll have to create various documents, such as the Articles of Organization, which you file with the Minnesota Secretary of State. However, another equally vital document is the LLC operating agreement.
What is an LLC operating agreement?
When forming a corporation, you need officers such as a president and treasurer. LLCs, however, are much more relaxed, meaning you can determine the structure of your business based on your specific needs and circumstances. That’s where an operating agreement comes in.
This document outlines all of the back-end details you and the other founding members need to know about your company’s structure and operating plans. These details can include ownership, profit and loss distribution, voting authority, management hierarchy, and more.
There are two primary reasons to create an operating agreement. First, it ensures that all founding members are on the same page (literally) regarding how the business will run, both for daily operations and administrative duties. Second, the agreement serves as a binding agreement among the members that sets out each person’s rights and responsibilities and helps show the LLC is a separate business.
Why is an operating agreement important for Minnesota LLCs?
Running a successful business is challenging and complex, involving numerous moving parts. Without an operating agreement in place, you’ll have to figure out what to do whenever you approach a key decision or roadblock. For example, who makes final decisions for business purchases? Do all founding members have a say, or does one person have sole authority? Similarly, how are profits divided among founding members? Did everyone invest the same amount, or will those who invested more get a larger profit share?
Having an operating agreement ensures everyone knows what to do when these (and other) problems arise. If you don’t have an agreement in place, that can lead to infighting, lawsuits, and other issues that could derail or destroy your business. Also, without an official agreement, your LLC follows the default rules in Minnesota’s LLC Act (Chapter 322C).
Part of the appeal of forming an LLC is that you get to decide how to shape and run your business. Without an operating agreement, though, you’re essentially abdicating that flexibility.
Key components of a Minnesota LLC operating agreement
Not all businesses will include the same details in their operating agreements, but here are some core components that should be outlined within the document.
- Management Structure: Who is in charge of what, and which titles will everyone have? Is there a hierarchy where some members or managers have final authority over specific decisions?
- Membership Interest: Do all founding members have equal interest in the company, or are percentages weighted based on certain factors?
- Profit and Loss Distribution: How are profits divided, and how are losses handled by the company? Who gets to claim losses for tax purposes?
- Voting Rights and Decision-Making: Specific company-wide decisions should be handled by all founding members. Does everyone get an equal vote, and what happens if there is a tie? Does one person have veto power for specific types of decisions?
- Bookkeeping Procedures: How will accounts be handled internally? Who will be in charge of overseeing the books, and when will members be notified of any discrepancies?
- Member Dissolution and Addition: What happens if a founding member leaves the business? Is there a process for buying out individual members? What happens if someone else wants to become a founding member of the company?
- Business Dissolution: What is the process for how to dissolve an LLC in Minnesota for your business? What happens if the company is sold to a third party or owes outstanding debts?
As a rule, it’s always better to add more details, even to minor elements that may seem intuitive. Because the operating agreement binds all members, you must make sure it’s as comprehensive as possible. Also, consider how the business will grow and change over time, such as opening new locations, moving into new states, franchising stores to independent owners, and so on.
How to create an LLC operating agreement in Minnesota
Before you can finalize your operating agreement, you must meet with other founding members to discuss the various details that will be included in the document. First, gather information about the business itself, such as its primary address, contact information for all founding members, registered agent details, mailing address, and more.
Next, discuss how you and the other members will handle specific procedures, such as voting and management. During these discussions, write down every detail and repeat it back. Make any adjustments based on feedback as needed.
Once you have discussed all the details of the agreement, it’s often best to work with a third-party consultant. Consultants can help you refine any legal terms or definitions to ensure that your agreement is as airtight as possible. Try to remove any instances of ambiguity to ensure there are no assumptions or gray areas within the document.
Minnesota-specific considerations
Although Minnesota doesn’t require LLCs to have an operating agreement, the law does stipulate what can and can’t be included within the document. It is imperative to review the statutes governing operating agreements to avoid any potential legal hassles down the road. This is another reason why it’s best to consult with a Minnesota-based legal professional before finalizing and signing your agreement.
Minnesota’s LLC Act defines an operating agreement as an agreement among all members (including a sole member) that can be oral, implied, or in a record (Minn. Stat. 322C.0102). If your agreement doesn’t cover a topic, the Act’s default rules apply. A written agreement is still the best way to avoid disputes.
You can also use templates from Minnesota-based LLC formation services. These templates help keep you on track when discussing the details of the agreement, and they can address any specific details covered by Minnesota law.
Final thoughts and next steps
Creating a comprehensive operating agreement for your Minnesota LLC can be a time-consuming process, but it is an essential part of forming your business. The more work you put into this document now, the easier it will be to address any issues or concerns later on. Working with LLC formation services can help expedite this process and ensure that your business starts on the strongest foundation possible.
FAQ
No, Minnesota does not require LLCs to have an operating agreement to do business.
Yes. Minnesota doesn’t require notarization, and an operating agreement can even be oral or implied. A written agreement signed by all members is the clearest record. A template or a legal professional can help you avoid gaps or confusing language.
If you don’t have an operating agreement, your LLC follows Minnesota’s default LLC rules, which may not fit your business, and disagreements can be harder to resolve. In some cases, you may have to use lawyers to settle disputes or disagreements, leading to expensive delays and setbacks for your company.
As a single-member LLC, you don’t necessarily need an operating agreement. However, it can still be a good idea to have one, especially to prove that you own the business and are in charge of it.
As with any other legal document related to your business, you should store the operating agreement in a secure, fireproof location. It’s also a good idea to scan the document onto an encrypted server so there’s always a digital backup if necessary.