Washington State LLC Operating Agreement

Planning to start a business? Then be prepared to complete all sorts of paperwork. Some of these documents may be requested by local, state, or federal municipalities and some are useful tools that can take your new venture from the “good idea” concept to a successful, well-structured, and legally-sound business.

One of the more vital documents is the LLC Operating Agreement. The purpose of a Limited Liability Company Operating Agreement is to outline specific details of how the company will be run, including leadership, management, decision-making, and general financial organization.

Although the state of Washington doesn’t require the creation of a LLC Operating Agreement to begin conducting business, it does recommend that business owners/partners create one to help with overall organization and planning. This agreement can also reduce any personal liability and make business details clear for all parties in the event of future legal disputes or even dissolution of the business.

Continue reading to learn more about the usefulness of this type of agreement in Washington and why it’s a good idea to occasionally refer to it and even amend it if needed, rather than initially creating it and putting it aside.

What is an LLC operating agreement?

A LLC Operating Agreement can be seen as a combination of a contract between all the principals involved in creating the LLC and a how-to guide for how the new company will function. It includes information about different roles and duties of owners, partners, and managers. This can include portions of ownership, such as financial backers who have a stake but may not be interested in overall operations and daily details but are still considered part of the organization.

It also includes financial components, such as outlining how financial or corporate decisions will be made. This may specify routine matters as well as larger legal issues that potentially could impact business.

The agreement can also outline general expectations and even specify how the company will respond in certain circumstances, such as a partner leaving, a new partner joining, or legal action. 

It’s important that the agreement be signed by all involved parties and treated as a contract. Doing so provides legal protection to all members in the event of legal proceedings or financial challenges, since the agreement can minimize any personal liability.

Why is an operating agreement important for Washington LLCs?

Although an Operating Agreement isn’t required for your Washington state LLC, state officials do recommend it since it is a useful document for a business as it grows, and, if created properly, also provides a road map for various circumstances.

If an agreement isn’t in place, if the text is too vague or general, or not everyone signs it, it could lead to disagreements over operations, management, spending, or other shared decisions.

Benefits of an agreement

• Everyone involved is on the same page, figuratively, regarding overall operations.
• Clear definition of all roles and processes, which can help avoid potential conflicts and miscommunications in the future.
• Partners/owners can create their own unique rules and structure, rather than following a template or state rules.
• The LLC will provide protection and state everyone’s initial investment.

Having this agreement in place also makes it easier to seek investors, apply for business loans, open business accounts, and seek legal counsel. Certainly a sole proprietor can take advantage of these benefits, but a LLC generally provides the perception that the venture has been carefully planned and discussed with all involved parties.  

Risk of not having a LLC operating agreement

When something structural changes, such as a partner leaving, the agreement should be referred to. If one wasn’t done well in the first place, it could open the company and principals to liability. It could also require the company to default and to follow the laws of the state it is based in, rather than anything that was unique to the company.

One example is if the company is forced to dissolve without an agreement, Washington officials may divide any losses or profits equally between partners and investors. But if a company dissolves with an agreement, it could specify who gets different percentages and why. Understanding how to dissolve an LLC in Washington state helps ensure the process is handled correctly and fairly.

Key components of a Washington LLC operating agreement

When creating this document, some of the items that should be defined include:

• Basic details such as legal name, location, when the business began, and when the agreement was finalized
•  Structure, including all owners and key personnel and their contact information.
• A list of key roles and responsibilities, such as who files taxes
• Decision-making process and voting rights. This can define whether some members will get more votes than others or whether everyone will receive the same amount.
• Break-down of percentage of ownership
• How profits and losses will be distributed
• What happens if a member leaves or dies?
• What happens if a member is asked/required to leave, such as a buy-out?
• What personal circumstances could affect ownership, such as divorce, bankruptcy, disability or illegal activity?
• What happens in the case of dissolution?
• Succession information, which will define how founders can retire and new members/investors can join
• Under what terms could the company be sold?
• What will be required to amend the agreement in the future, such as what percentage of voting members must agree                                                                                                                                                                                                                    

How to create an LLC operating agreement in Washington

Because the state of Washington doesn’t require a LLC Operating Agreement, your company doesn’t have to follow specific rules, and could customize it as needed.

There are a variety of templates online that can work as a starting place, since much of the information contained in these is similar, such as details about owners and decision-making powers. It would be up to you to add specific details about leadership and location.

The key item in any type of agreement is to make sure all parties sign and date the document to acknowledge their role in the business venture. Then make sure copies are given to everyone for their records.

Consider running the document by legal counsel who is familiar with business documents in Washington to make sure the details are sufficient and everyone involved is included and protected.  

Washington-specific considerations

Washington is definitely an attractive state to consider doing business in. Beyond quality of life and beautiful scenery, it’s home to some of the country’s top businesses, such as Amazon and Microsoft. It has a thriving aerospace industry and access to plenty of shipping options along the Pacific Ocean and Columbia River, and borders Canada.

It’s considered generally business-friendly, especially for small businesses. It is also seeing an increase in the population along with much of the West Coast.

For those considering creating a LLC in Washington, be aware that the state doesn’t have corporate or personal income taxes but does charge sales tax, personal property tax, and business and occupation tax, which include LLCs.  

Conclusion

Overall, a LLC Operating Agreement is a smart idea when creating your business entity. Even though it isn’t legally required in Washington, it’s a useful document to ensure everyone involved is aware of their responsibilities and is protected. Creating one will improve communication and cut down on the risk of disagreements.

A thorough document will also be as useful as your business plan in creating a road map of how everything will be structured, how decisions will be made, and how profits and losses will be divided. Plus, it will be helpful to share when seeking financing, whether from a financial institution or from investors. It should also be considered a living document that grows with your company, and can be referred to in different circumstances.

If you’re ready to take the next steps, we can help with forming a LLC, which can include advice on what steps to take when creating an operating agreement. Please contact us for more details and learn how to get started.  

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