Establishing a limited liability company (LLC) isn’t overly complicated, but it does involve filling out and filing a fair amount of legal paperwork. In Rhode Island specifically, those looking to form an LLC will need to file articles of organization with the state, appoint a registered agent, and complete an annual report.

In addition to required documentation, many LLC owners also choose to draft operating agreements, which can guide businesses through critical decision-making processes and keep things running smoothly. 

Although not legally required as part of filing an LLC in Rhode Island, taking the time to create a comprehensive operating agreement is still highly recommended for business owners, and for good reason. Read on to learn more about what an LLC operating agreement entails, why these documents are important for Rhode Island LLCs, and how to draft one for your own business. 

What is an LLC Operating Agreement?

Specifically, an LLC operating agreement is a document that details various aspects of an LLC’s business structure, including rules regarding business relationships between members/stakeholders. Unlike articles of organization, which are filed with the state and include basic information about an LLC that becomes public information, an operating agreement is a private document that helps to govern the everyday operations of the business itself.

Some specific details that may be covered in an LLC operating agreement include:

• Contingency plans for the dissolution of the LLC.
• Specific roles and responsibilities of each LLC member.
• Ownership percentages and rules for allocating profits/losses.
• Requirements for voting on issues and making decisions.

Ultimately, a well-written LLC operating agreement can play a critical role in protecting LLC members from legal challenges while clarifying day-to-day business operations, all of which can help businesses run more smoothly.

Why is an Operating Agreement Important for Rhode Island LLCs?

Even though operating agreements are not legally required for LLCs in Rhode Island, it is still highly recommended that business owners take the time to craft these agreements, and to do so carefully.

Avoiding member disputes

One of the most important objectives of an operating agreement is to clearly outline how profits within the business will be allocated, as well as how different procedures will be carried out and decisions made. By having these details covered in an operating agreement, members of an LLC can avoid many sources of potential conflict.

Establishing continuity plans

When an LLC is dissolved, or even when a single member leaves, having processes and procedures already in place to handle these kinds of changes can save members from many headaches later on. For example, if one member leaves the LLC, an operating agreement might detail how that person’s ownership interest will be redistributed so the business can continue to run smoothly and without interruption.

Giving businesses more legitimacy

Especially for single-member LLCs, having an operating agreement in place can help businesses appear more formal and legitimate, especially in the event that a legal issue with the LLC owner should ever arise. In addition to helping LLC owners guide and operate their businesses, then, operating agreements can appeal more reputable than sole proprietorships alone.

Creating procedures that address gaps in Rhode Island law

Although Rhode Island laws related to LLCs and business operations are expansive, they cannot possibly cover every possible scenario. This is where having an operating agreement in place can make all the difference by creating procedures and processes for potential gaps in Rhode Island law. 

Key Components of a Rhode Island LLC Operating Agreement

Because of the private nature of an LLC operating agreement, exactly what you decide to include is entirely up to you and your team. However, there are some basic components that most operating agreements will include, including:

Ownership and management structure

In this section, define each of your founding members, along with their membership percentages, being sure to designate if any members are non-voting. This is also a good place to include any details about capital contribution amounts for each member, as well as the process for admitting additional members to the LLC.

Member roles and responsibilities

Your Rhode Island LLC operating agreement should also detail the specific roles and responsibilities of each member. This should include such roles as President, Secretary, and Treasurer, along with precise duties and expectations for each role. 

If your LLC will operate with any boards or committees, this should be detailed here as well.

Profit/loss distribution and contributions

This section of an LLC operating agreement should cover how much capital each member has contributed to the business, as well as how profits and losses will be distributed among members of the business (and how often). Be sure to include here whether members will receive distributions in the form of salaries, distributions, or dividends, as this can have tax and legal implications.

Member voting and decision-making

When issues come to a vote, members of your LLC should be able to turn to the operating agreement to understand exactly how decisions will be made. In this section, you’ll want to include information on the amount of voting power members have, as well as how any deadlocks in voting will be handled. This is also a good place to outline the vote threshold needed to add a new member to the LLC or approve other actions.

Dissolution plans and provisions

While no business owner wants to think about dissolution, it’s always important to plan ahead. Specifically, your operating agreement should dedicate a section to the conditions that might trigger dissolution of the LLC, as well as how any remaining funds and/or assets may be distributed to the remaining members of the business.

Changes in membership

If a member leaves the LLC or even if a member passes away, your operating agreement should have procedures in place to handle these kinds of scenarios. More specifically, you may even want to outline procedures for removing a member non-voluntarily.

How to Create an LLC Operating Agreement in Rhode Island

Because LLCs aren’t required to file operating agreements in Rhode Island, there’s no formal process you’ll need to take with the state to draft this document. However, there are some tips you can keep in mind as you prepare to draft an operating agreement for your Rhode Island LLC.

First, consider using a free template to help you get started. While you don’t have to follow the template 100%, using one can give you a better idea of what to include in your operating agreement. From there, you can customize the document as needed.

Even after you’ve drafted your LLC operating agreement, it’s a good idea to have an attorney review the document for any potential discrepancies or legal concerns.

When you and your team are satisfied with the document, all members should sign it and receive a copy of it, as this will formally execute the operating agreement. Be sure to keep the original document in a safe place with your other business records.

Rhode Island-Specific Considerations

When writing your operating agreement for a Rhode Island LLC, there are some state-specific factors to keep in mind as well. Be careful, for example, to write your dissolution rules in a way that reflects Rhode Island’s specific requirements for LLC dissolution. This includes providing advance warning to workers and ensuring that all final paychecks are paid to employees within 24 hours of their last day of work. These kinds of stipulations should be included in your operating agreement to avoid potential issues down the road.

Final Thoughts & Next Steps

Although creating an operating agreement for your Rhode Island LLC may seem daunting, it doesn’t have to be. By knowing what to include and by staying on top of the latest state-specific requirements for LLCs, you can execute this important document within your own business and enjoy the benefits of having an operating agreement that guides your business as it grows and scales.

Still looking for more guidance when it comes to your LLC? Tailor Brands is here to help with resources to help you form your LLC, create an operating agreement, appoint a registered agent, and so much more! Get in touch today to learn more and get started!

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