An operating agreement spells out how your business is structured, its membership, and foundational ways in which the LLC operates. It helps to clarify key elements of the company’s governance and is a powerful tool to be used by members. While Vermont does not require LLCs to file an operating agreement, it’s a smart practice to develop one to ensure that there is no ambiguity about the core principles by which the company will be run.

In this article, we will further define what an LLC operating agreement is, with a close look at each of the elements. We’ll also discuss the benefits of having an LLC operating agreement and what can happen if one is not in place. We’ll also provide key FAQs around the operating agreement process.

What is an LLC Operating Agreement?

An LLC operating agreement is a legally binding document designed to define and clarify operational details and protect owners, who are referred to as members in LLC structures.

It provides details on key elements of the LLC’s finances, working rules, growth, tax structure and dissolution.

The LLC operating agreement protects members in pivotal moments in the life of the company. It details, for example, what happens when new members are brought on board and how disputes will be handled. If a member decides to leave the company, it defines responsibilities among all parties involved.

Why is an Operating Agreement Important for Vermont LLCs?

The state of Vermont’s LLC statute does not mandate that an LLC operating agreement be filed. However, legal experts agree that having an agreement in place is a smart move. Among the main benefits of having an agreement in place are:

• Clarity. With an operating agreement, everyone involved will have a clear understanding of the rules governing the LLC. Whether it’s the day-to-day operations or larger matters, the LLC will guide the processes around decision-making, voting and management
• Protection. Without an operating agreement in place, your LLC could be mistaken for a sole proprietorship. Sole proprietorship owners do not have the same protections as the members of an LLC, leaving them vulnerable financially if there is a court judgement against them. The agreement clearly separates the LLC from its members
• Dispute Resolution. While no one goes into a business relationship expecting there to be disputes, disagreements arise regularly. The operating agreement is an effective tool for resolving said disputes
• Customization. An operating agreement lets you customize the way your LLC will run, giving you flexibility to structure operations the way you want
• Decision-Making. Your operating agreement details how key decisions are made within the company, with clearly defined roles, responsibilities and procedures, reducing the risk of conflicts or misunderstandings

Without an LLC operating agreement in place, you and your company face significant legal and financial risks. As noted, an LLC without an operating agreement could be considered a sole proprietorship, which does not carry the same legal protection. That means your personal assets could be exposed in an adverse legal judgement.

In addition, members of LLCs without operating agreements could run into legal problems should disagreements arise, leaving the outcomes in the hands of courts. In some cases, an operating agreement is also required to do business with banks or other lenders.

Key Components of a Vermont LLC Operating Agreement

While there is no legal requirement in Vermont to file an operating agreement, most documents contain the following sections.

Basic information

This section contains the legal name of the LLC, its purpose and its principal address. If there is a registered agent for the company, that individual or entity’s information should also be included.

Ownership structure

Each member’s name and address are listed here. In addition, the percentage of ownership for each needs to be listed, along with the kinds of membership interests each member holds.

Capital contributions are also included in this section, including whether the capital is initial or ongoing and what type of capital each is responsible for, such as cash or property.

This section is also where you detail what happens if ownership interests are transferred, if new members are brought into the company and the responsibilities of each member if they choose to exit the LLC.

Member roles and responsibilities

LLCs provide members with options for how their company is managed. An LLC can be member-managed, in which one of the managers operates the company. Alternatively, a manager-managed LLC hires a manager to run the LLC.

This section should explain which management structure is in place and what roles and duties each member has.

In this section, you should detail what the roles and responsibilities are for each member, including fiduciary responsibilities.

If you do not want members who leave to be in direct competition with your business, you can detail non-compete agreements in this section, too.

Voting rights and decision-making

How will your company make important decisions? The voting rights of each member are detailed here, including whether any members have weighted voting privileges. Determine when and how meetings are held, including any notice requirements and quorum rules for those meetings.

Profit and loss distribution

The allocation of profits and losses among the managers needs to be spelled out, using either an ownership percentage basis or a different method. Also outline the process and timeline for distributing profits and losses to members. This section may also indicate the accounting methods used, any audit requirements and tax preparation instructions.

Dissolution terms

If the LLC dissolves, this section lays out the steps to be taken to close down the business, particularly the distribution of assets after debts are resolved. It may also indicate the events that could trigger a dissolution, such as a member’s death or disability or a vote by the members.

How to Create an LLC Operating Agreement in Vermont

Creating an operating agreement is an important element to starting your LLC. There are useful templates available online, including Tailor Brands, which offers comprehensive LLC formation services.

It’s important when creating an LLC operating agreement to consult with an attorney to ensure that your agreement protects you and has the proper legal language to hold up in court.

Having the LLC notarized is another important step. While not required, having the documents notarized provides credibility.

Vermont-Specific Considerations

Vermont has no legal mandate for establishing an LLC operating agreement.

The process of filing an LLC in Vermont is fairly straightforward, and includes completing the following steps:

• Identifying a unique name for your company
• Appointing a registered agent
• Filing articles of organization
• Paying a filing fee

Final Thoughts & Next Steps

As a legal safeguard and for its clarity, an LLC operating agreement is clearly a smart move for forming your LLC in Vermont. The vulnerability you face, both in terms of liability and in potential disagreements, is significant without one firmly in place.

As a next step, contact Tailor Brands, a proven leader in helping thousands of LLCs with the formation process.

Learn more about how to create your LLC operating agreement by contacting Tailor Brands today.

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