Starting a new business comes with its fair share of paperwork, and if you’re registering an LLC in Utah, there’s one important document you shouldn’t overlook: an operating agreement. This internal agreement plays a crucial role in protecting your business and your personal assets. Thanks to the limited liability structure of an LLC, owners are generally shielded from personal responsibility for business debts or legal actions—but having a clear operating agreement strengthens that protection.

Although Utah doesn’t legally require LLCs to have an operating agreement, creating one is strongly recommended. Legal and financial professionals often view it as essential for establishing a clear management structure and decision-making process. It won’t need to be filed with the state, but keeping it with your business records can help prevent internal disputes and demonstrate your LLC’s legitimacy if legal or financial issues arise.

What is an LLC Operating Agreement?

An LLC operating agreement defines how the business operates. While protecting LLC members, which is what LLC owners are called, it also clarifies member rights and responsibilities in the running of the business.

As a business owner, liability is a concern. No matter the nature of your enterprise, there is always something that can go wrong, and you could end up being sued. You don’t want your personal assets to be vulnerable to lawsuits and creditors.

The LLC operating agreement should have an indemnification provision to hold harmless a member against any claim or demand or any “debt, obligation or other liability” incurred due to their current or former capacity as a member.  However, under Utah law, an operating agreement cannot “relieve or exonerate a person from liability for conduct involving bad faith, willful misconduct, or recklessness.”

Who Qualifies as an LLC Member?

As per the IRS, members may consist of individuals, corporations, other LLCs, or foreign entities. These parties generally have some level of equity in the LLC. There is no limit on the number of LLC members.

When an LLC is member-managed, all members are involved in the day-to-day operations of the business. Besides the member-managed LLC structure, there is a manager-managed LLC.

Why is an Operating Agreement Important for Utah LLCs?

There are many benefits and few downsides to a Utah LLC operating agreement. Such a document can resolve internal disputes because rules are spelled out in the agreement. 

Without an operating agreement in place, the LLC is still subject to Utah’s default provisions. Such general provisions may not align with member liability and other situations.  

In a worst-case scenario, a business in financial or legal trouble operating without an LLC can force owners into personal bankruptcy. The bottom line is that you could lose everything. Avoid such a scary scenario by ensuring your Utah business has an LLC operating agreement.

Key Components of a Utah LLC Operating Agreement

The most crucial components of a Utah LLC operating agreement include:

• Ownership structure: The primary LLC ownership structure is either single-member or multiple-member. The operating agreement also defines the ownership percentage of each member.
• Member roles and responsibilities: By spelling out the formal member roles, the management structure is clarified. That avoids issues if disagreements occur and roles become blurred.
• Membership interest transfer: LLC membership transfer usually requires the consent of other members, unless the operating agreement states otherwise.  Should a member die, the other members may want to purchase the deceased member’s percentage from the heirs. The document also addresses how new members may be added to the LLC.
• Voting rights and decision-making: Voting rights and decision-making in an LLC do not necessarily correspond to member ownership percentage. The operating agreement explicitly defines whether a member takes on a management role or an investor taking on a more passive role.
• Accounting procedures: All LLCs, including single-member LLCs, must have a bank account and credit card in the LLC’s name. Commingling of personal and LLC funds is prohibited. The operating agreement states whether the LLC uses the accrual or cash accounting method.
• Profit and loss distribution: While profit and loss distributions are generally allocated based on member ownership percentage, the operating agreement can determine a different allocation based on specific circumstances.
• Tax status: While single-member LLCs can be taxed in a way similar to that of a sole proprietorship, multiple member LLCs can decide to be taxed as a partnership or corporation. For the latter, they must file election status with the IRS.
• LLC duration: Some LLCs are designed to last indefinitely. Others may exist for a specific period of time.
• Dissolution terms: Including how the LLC might dissolve is an integral part of the operating agreement. Before a formal dissolution, all LLC activities must be settled.
• How to Create an LLC Operating Agreement in Utah

Under Utah law, one or more persons may form an LLC by submitting a certificate of organization to the state. This certificate of organization must include:

• LLC name, which must conform to Utah naming requirements
• LLC purpose
• Mailing address of LLC’s main office
• A Utah-registered agent who can receive LLC legal documents
• State whether the LLC is a professional service or a low-profit LLC

Consulting a legal professional to create your Utah LLC operating agreement is generally a wise idea. You want to ensure that the document protects you from legal risks and threats to personal assets.  

Utah-Specific Considerations

Utah is one of the relatively few states offering a series LLC. This is a type of LLC in which a “parent” LLC has one or more series established under it. Each series, or cell, has characteristics that distinguish it from the parent LLC.

Every cell can have its own members, assets, investment objectives, and the like. The cell is liable only for its own obligations and debts. A series LLC is a flexible but somewhat complex business structure. 

Sole proprietors in Utah are especially vulnerable if they do not have an LLC in place. A one-person business operating under the owner’s name and not as an LLC puts personal assets, including real estate and vehicles, in potential jeopardy should financial or legal issues arise.

While Utah does not mandate LLC operating agreements, a default provision exists under the Utah Revised Limited Liability Company Act. The default regulations may not prove the best choice for your particular business. That’s just one reason a custom-tailored Utah LLC operating agreement is valuable.

Conclusion

While Utah doesn’t legally require you to create an LLC operating agreement, having one is a smart move for protecting your business and clarifying how it will be managed. This document helps prevent misunderstandings, outlines ownership rights, and strengthens your LLC’s limited liability protection. Whether you’re starting a single-member LLC or managing a larger team, taking the time to draft an operating agreement can save you from costly disputes later on. As you move forward with your business journey in Utah, making this agreement part of your formation process is a step toward long-term stability and peace of mind.

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