A Limited Liability Corporation, or LLC, is a hybrid business organization that provides members with some of the legal protections of a corporation while offering the flexibility of a partnership, such as fewer operating requirements and a pass-through tax structure. Like all corporations, an LLC limits the liability of its members for the business’s contractual obligations. On the other hand, the ability to create an operating agreement that defines member responsibilities and outlines the process for making decisions within the LLC provides tremendous flexibility, allowing the agreement to be tailored to the specific needs of the LLC and its members.

Operating agreements can be complex or straightforward, depending on the nature and needs of the LLC and its business. Regardless of its details, an operating agreement serves as a roadmap for how the members will operate the company, even as it grows and evolves, and members revise the agreement over time. This article will help you understand LLC operating agreements generally and for Mississippi LLCs specifically. It will enhance your understanding of your role as a member and the key components of effective operating agreements and suggest critical best practices when creating an operating agreement for your Mississippi LLC.

What is an LLC Operating Agreement?

Mississippi LLC operating agreements define the rights, duties, and liabilities of LLC members among themselves and with the LLC. Operating agreements provide the legal framework for how your LLC operates and are critical due to the flexibility they afford members when structuring the operating agreement. Operating agreements are legally enforceable, so they must describe the members’ protections and obligations. LLC members commonly vary in the value of their investments, as well as the skills and time they contribute to the LLC. These differences make it critical that operating agreements establish the relative rights of members, outline the process for amending the agreement, and provide for protecting the interests of minority owners when differences arise among members. Operating agreements offer great flexibility, so the choices should be well-considered and take into account the points discussed below.

Why is an Operating Agreement Important for Mississippi LLCs?

Effective operating agreements define how LLC work. Properly structured, they define how the LLC will make day-to-day and strategic decisions and help reduce disputes among members. Like people involved in any business, LLC members can disagree on issues. However, the operating agreement should define how decisions are made, thereby eliminating disputes about the decision-making process and allowing members to focus on the substance of the issues.

Key Components of a Mississippi LLC Operating Agreement

In addition to identifying basic information, such as your LLC name, its business purpose, mailing address, and registered agent, an operating agreement should address the five key topics outlined below.

Ownership structure

The operating agreement must identify the names and contact information of the LLC members, specify each member’s initial and anticipated financial and non-financial contributions, include the LLC’s bank account information, record the date of the LLC’s initial meeting, and include the signatures of all members. Additionally, it should address the distribution of shares when new members join the LLC or existing members leave.

Member roles and responsibilities

The operating agreement must define how its members manage the LLC in Mississippi. How are strategic directions set, and by whom? Who manages day-to-day operations, LLC members or hired managers- and what discretion do they have in making operational decisions?

Voting rights and decision-making

Your LLC must make decisions about current operations and will need to make decisions about the future. How you define the decision-making process is critical. The defined process may require establishing the frequency of member meetings, specifying how to conduct those meetings, and outlining the voting process. Identifying whether or which decisions must pass specific voting thresholds, unanimous, majority, or specified percentages, helps minimize future disagreements.

Even the most successful LLCs experience transitions in their members or hired managers. The more successful your LLC, the more likely it is to experience transition, so defining how to manage those transitions is critical. Likewise, determining compensation procedures for hired or member business managers is vital, primarily when differences exist in the financial investments, expertise, and day-to-day management responsibilities among members.

Profit and loss distribution

Ideally, your business will prove profitable. Regardless of its financial results, however, the LLC must allocate profits and losses among its members, so determining their distribution is fundamental. You should also include other core financial choices in the operating agreement, such as defining the LLC’s fiscal year, establishing fundamental financial record-keeping practices, and outlining the LLC’s tax implications.

Dissolution terms

LLCs may dissolve due to disagreements among members or limited business success. LLCs also dissolve because their success leads to buyouts, acquisitions, or other changes. Your operating agreement needs to identify how to add new members, remove existing members, or dissolve the LLC entirely. Defining these procedures allows predictability, whether the changes result from mutual agreement or conflict. Defining these steps in advance reduced the likelihood of misunderstandings and delays.

How to Create an LLC Operating Agreement in Mississippi

Mississippi does not require LLCs to create or submit an operating agreement; however, having one is highly recommended. To form an LLC in Mississippi requires that you choose an LLC name, appoint a registered agent, submit other required information, and file Articles of Organization and a Certificate of Formation with the Mississippi Secretary of State.

You also must acquire an IRS Employer Identification Number (EIN) and confirm whether you must register to pay state taxes or obtain business licenses.

Your operating agreement should:

• List the LCC members, their shares, and responsibilities
• Confirm whether your LLC will be member-managed or manager-managed
• Describe your administrative and voting procedures, including how the LLC adds and removes members and dissolves itself.

LLC operating agreements are legal documents. As legal documents, they require precise language and should address all necessary issues. Therefore, many people forming LLCs work with a lawyer or a service like Tailor Brands that specializes in LLC operating agreements. Lawyers and other outside entities will walk you through the steps needed to complete your operating agreement.

Mississippi-Specific Considerations

While every state has slightly different LLC requirements, Mississippi does not require an operating agreement, and its LLC requirements are within the norm relative to other states. Nevertheless, we recommend that you seek counsel to ensure your operating agreement and LLC filing meet all the State of Mississippi’s requirements.

Final Thoughts & Next Steps

Mississippi law does not require LLCs to have or submit a written operating agreement. Still, a well-conceived and well-written operating agreement offers a roadmap for how your LLC will conduct business, reach agreements or settle disagreements among its members, and manage the process of new members joining and existing members exiting.

Without an operating agreement, your LLC is subject to Mississippi’s default LLC laws, so it is in your best interest to develop an operating agreement tailored to your business and LLC member needs.

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