What is an LLC Operating Agreement?

An LLC operating agreement is an internal legal document that specifies the financial and functional structure of your Ohio LLC. It provides rules and clarity on the business relationship between LLC members.

Unlike the formal filing documents you submit with your initial Ohio LLC registration, an operating agreement is an internal governing document strictly for your LLC and its members. This private agreement allows you to customize ownership terms, establish processes, and formalize rules that best fit your LLC.

Some of the key details covered in an operating agreement include:

• Ownership percentages and membership rights
• Member roles, responsibilities, and management structure
• Protocols for voting, meetings, and decision-making
• Rules for allocating profits and losses
• Plans for adding or removing members
• Contingency plans for dissolution or member exits

Essentially, the operating agreement nails down the operational logistics that keep your Ohio LLC functioning smoothly while also protecting the financial interests of all members. It provides guidance when questions arise and establishes ground rules for making business decisions.

With a comprehensive operating agreement in place, all LLC members have clarity on their rights and expectations. This transparency goes a long way in preventing disagreements or misunderstandings down the road.

Why Have an Operating Agreement?

While an operating agreement is not legally mandated in Ohio, it provides major benefits that all LLCs should take advantage of, including:

Filling Gaps in Ohio LLC Laws

Ohio LLC statutes simply do not cover all potential legal or operational issues that may come up. A detailed operating agreement fills in holes that state laws leave open. For example, the agreement can specifically address scenarios like member disability, death, or divorce that state statutes do not dictate protocol for.

Preventing Disputes Between Members

Disagreements between LLC members are probably inevitable. However, a solid operating agreement gets all members aligned on procedures for managing the company, allocating profits, admitting new members, dissolving the LLC, and more. It eliminates many areas of potential conflict.

Defining Ownership Interests

Without an operating agreement, ownership percentages default to equal divisions between members. The operating agreement lets you customize exact ownership stakes and membership units based on which members contributed more financially or sweat equity during the LLC formation.

Establishing Official Governance Procedures

Ohio LLC laws permit informal management practices. But an operating agreement allows you to define structured governance protocols for your LLC like how/when to conduct member meetings, voting margins required for decisions, management roles, etc. This legitimacy protects your LLC.

Clarifying Business Continuity Plans

If a member leaves or passes away, having an operating agreement ensures there is a legal game plan for redistributing that person’s ownership interest. It also covers contingencies like member disability or retirement.

Masking Informality of Solo Member LLCs

While single member LLCs are permitted in Ohio, they can appear informal since they essentially function as sole proprietorships. A detailed operating agreement makes the business seem more legitimate should the LLC ever be scrutinized.

Without an operating agreement guiding these types of situations, your Ohio LLC risks running into problems down the road that create legal vulnerabilities and discord between members. Don’t take that chance.

What to Include in Your Ohio LLC Operating Agreement

LLC operating agreements are unique to each company, but some standard sections appear in most. Here are key components to consider covering in your agreement:

Ownership Structure

The ownership structure section should clearly outline:

• Founding members and their initial membership percentages
• Classes of membership (if applicable) like voting vs non-voting members
• Member capital contribution amounts, whether financial or sweat equity
• How future members can be admitted and impacted on ownership interests

Member Roles and Management Structure

This section clarifies:

• The roles and responsibilities expected of each member
• If the LLC will appoint managers vs direct management by members
• Which members will serve as officers like President, Treasurer, Secretary
• Establishing boards, committees, or advisory positions (if applicable)
• Authority delegated to managers and limitations

Member Voting and Decision Making

Details to define in this section include:

• If voting power is tied to ownership percentages
• Vote thresholds required to approve actions like adding members
• How to handle voting deadlocks between members or managers
• Rules regarding member meetings, votes taken outside meetings, convening special meetings, etc.

Capital Contributions and Profit/Loss Distribution

This covers:

• How much capital each member has contributed or has promised to contribute
• How profits and losses will be shared among members annually
• Whether members will receive distributions, dividends, or salaries
• If guaranteed payments to members will be deducted before profit distributions
• The process and requirements for members to receive profit distributions

Changes in Membership

Address scenarios like:

• Voluntary withdrawal of a member – will remaining members have right of first refusal for their membership interest?
• Involuntary removal of a member due to misconduct – how will their interest be valued?
• An existing member transferring interests to a third party like a spouse
• Death, retirement, disability, bankruptcy, or divorce of a member – how will it impact their interest?
• Adding new members in the future – vote thresholds and impact on profit shares

Dissolution Provisions

If dissolving the LLC, outline:

• Conditions that would trigger dissolution
• How remaining assets and cash will be distributed to members upon liquidation
• Who will handle the dissolution process and notify creditors

Miscellaneous Provisions

This section covers other rules like:

• Requirements for keeping company records and meeting minutes
• Filing annual reports and taxes
• Rules regarding outside business interests of members
• Use of LLC property like vehicles or equipment by members
• Requiring liability insurance for the LLC

Drafting Your Ohio LLC Operating Agreement

When it’s time to create your operating agreement, here are some tips:

• Use available templates and resources online to model your document after. Many legal sites provide free LLC operating agreement templates that you can customize.
• Make sure to fully understand Ohio laws regarding LLC management and finance. Consider consulting a local business attorney familiar with Ohio LLC statutes.
• Outline procedures, ownership structure, member duties, dissolution terms, and all other details discussed above before drafting the document.
• Be thorough but concise in your language. Attempt to address all potential scenarios but don’t make the agreement overly long and complex.
• Consider having an attorney review your agreement, especially if you have multiple members or complex ownership structures.
• Formally execute the agreement by having all LLC members sign and date it. Keep the original in your official company records.

While the process may seem daunting, start simple and modify your operating agreement over time. The goal is to get major policies and procedures documented for providing direction to your Ohio LLC.

Ohio-Specific Considerations

When crafting an operating agreement for an Ohio LLC, be sure to keep the following state-specific factors in mind:

Indemnification Limitations

Ohio law prohibits LLCs from indemnifying members or managers from legal actions brought by the LLC itself. Indemnification also cannot protect against negligence/misconduct that harms the company.

Series LLC Parameters

Ohio permits forming LLCs with designated “series” for asset and liability segmentation. Carefully outline the structure, ownership, rights, and operational separations between each series in the operating agreement.

Oral Agreements

Ohio allows LLCs to form oral operating agreements. However, documenting terms in writing is highly recommended for legal protection.

Unanimous Approval

Unless specified otherwise in the operating agreement, actions like admitting new members or amending the agreement require unanimous approval from all members under Ohio laws.

Dissolution Rules

Ohio LLCs can dissolve if there are fewer than two members for 12 consecutive months.Outline contingency plans.

Ready to Get Started? Contact Us Today

Hopefully, you have a better understanding of what you need to know with regard to creating an effective operating agreement for your Ohio LLC. With a customized agreement in place, your LLC will have clear financial and operational rules to follow, preventing potential disputes down the road. Be sure to consult an attorney to ensure your agreement complies with state-specific laws. Revisit it periodically as your business evolves. An operating agreement sets up your LLC for success through structured governance and strategic planning. 

Ready to get started? Tailor Brands makes it easy to form your LLC online and create a personalized operating agreement fast. Sign up today to protect and organize your new business!

FAQs