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 agencies 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.
Washington doesn’t require a written operating agreement. The state’s LLC Act says your LLC agreement can be written, oral or implied (RCW 25.15.006), but a clear, signed written agreement is much easier to rely on, and it’s a good idea to create one to help with organization and planning. It can also help protect your LLC’s liability shield by showing the business is run separately from its owners, and it makes 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?
An 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 gives all members a clear record to rely on in the event of legal proceedings or financial challenges.
Why is an operating agreement important for Washington LLCs?
Although a written Operating Agreement isn’t required for your Washington state LLC, 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 agreement records each member’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. Having an agreement shows lenders and investors that the business has been carefully planned.
Risk of not having an 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. Without an agreement, Washington’s default LLC rules apply instead of rules you chose.
For example, if your agreement doesn’t cover distributions, Washington law splits them in proportion to the agreed value of each member’s contributions (RCW 25.15.206). Your agreement can set a different split. 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
You can customize your agreement to fit your business, within the limits of the Washington LLC Act.
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 an 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 (B&O) tax, which apply to LLCs.
Conclusion
Overall, an LLC Operating Agreement is a smart idea when creating your business entity. Even though Washington doesn’t require a written agreement, 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 an 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.
FAQ
Copies should be given to everyone who has signed it. A copy should also be kept at your headquarters in a place that everyone is aware of and has access to. This way, it’s easy to reach in the event of questions or disputes. If you want to keep a copy elsewhere, such as a safe deposit box or at an attorney’s office, state this alternate location in the document itself.
Because Washington doesn’t require the filing of an agreement, you can tailor it to your organization’s needs and structure, within the limits of Washington law. Since the state doesn’t provide legal advice about these matters, consider checking with a licensed attorney in Washington for key points.
Yes! There are a variety of examples and general templates online. We can also provide assistance with forming an LLC, including what items to include in this document.
Washington doesn’t require a written operating agreement (an LLC agreement can be oral or implied), but having one is recommended. It sets out how your LLC is run, supports your liability protection and makes it easier to add members later.
It exposes individuals and the company to unnecessary legal liability. A partner could potentially claim they weren’t aware of certain terms or definitions if their signature was never added. Having a signed and dated document backs up the company and any other partners and is considered legally-binding.