The next step to take after you have met all the requirements for establishing an LLC in Wisconsin is to prepare an operating agreement. Although Wisconsin does not require you to file an operating agreement with the state, many business and legal experts strongly suggest you create one and keep it in your own business files.

What is an LLC Operating Agreement?

An operating agreement is a legally binding document agreed to by all members of the LLC. It is drafted by the owners themselves and all who sign the document are bound by it. If new members join, it is presumed they also agree with the terms expressed in the operating agreement.

The Agreement should specify in detail:

• How the business is structured.
• Who the owners of the business are.
• The expectations of each member.
• The amount of investment each member has made in the business.
• How profits and losses will be distributed.
• How disputes will be resolved.
• When meetings are held and what the voting process involves.
• How the business will be taxed.
• How the agreement can be amended.
• What events may trigger the need to dissolve the LLC.

Without an operating agreement, chaos is possible. The members won’t know what is expected of them. Disputes may fester and not be resolved. A member who has invested very little in the business may reap unfair profits if the operating agreement doesn’t state how the profits and losses will be handled.

By clarifying the business operations, members of the LLC are protected from unfairness in many ways. When the members have all agreed ahead of time on the terms of business operations, it makes the day-to-day operations of the business run smoothly.

Why is an Operating Agreement Important for Wisconsin LLCs?

Key benefits of an operating agreement include:

• Protection of the limited liability status of the business and shields members’ personal assets from business debts and legal liabilities. This is particularly important for a one-member LLC. Without the formal agreement, a court may decide the business looks more like a sole proprietorship than an LLC.
• Clarification of expectations and roles of individual members.
• Specification of how profits will be distributed.
• Defines rules for how decisions will be made.
• Provisions for exit planning and how ownership will be transferred.
• Description of how the members will deal with the death, divorce, or bankruptcy of a member and what to do if a member simply wants to leave the LLC.
• Avoids internal disagreements and disputes since issues are resolved by the terms of the operating agreement.
• Establishes the credibility of the LLC and makes it easier to open bank accounts, get loans, attract investors, and more.

If no operating agreement is in place, state rules apply to the operation of the LLC and disputes will be resolved according to state law. So, although the state does not require an operating agreement, it certainly has requirements as to how to deal with the issues when the LLC chooses not to create one of its own.

Just one example is that under the law, profits will be distributed equally between members instead of according to the ownership each member has in the LLC.

Key Components of a Wisconsin LLC Operating Agreement

There are some essential sections that are generally included in an operating agreement. They include, but are not limited to:

• Ownership structure.
• Effective date of the LLC and the operating agreement.
• Names, addresses, and phone numbers of all owners/members.
• Each member’s role and responsibilities.
• Who will be responsible for taking care of the taxes.
• Each member’s percentage interest in the business.
• How voting rights are handled. For example, does each member have one vote or does voting power correspond to the amount of investment in the business?
• How decisions are made.
• How profits and losses are distributed.
• How buyouts will be provided for.
• What happens if a member dies, gets divorced, gets disabled.
• How the agreement will be amended.
• How the LLC will be dissolved.

How to Create an LLC Operating Agreement in Wisconsin

Since Wisconsin does not require an operating agreement, there are no exact specifications for its contents. There are many online companies that have templates you can use to create an operating agreement but remember they are only templates. They are not specific to your LLC. Your operating agreement needs to be tailored to your specific business and the rights of your specific members.

If you choose an online service for creating your operating agreement, be sure to use one like Tailor Brands, which allows you to customize your agreement to meet the needs of your specific business.

Some suggested steps include:

• Begin with something like “This is the operating agreement for the LLC known as [name of your LLC] and this agreement is created on [date]. Members are [names of member/owners].
• Include all basic information about your LLC, including the date of its formation, principal business address, and name and address of your registered agent.
• Briefly describe the purpose of the LLC.
• Include the ownership interest of each member.
• Provide management structure. For example, is one member in charge of decision-making or do all members participate in this process?
• Are meetings held periodically or on an as-needed basis?
• Who will keep records of the meetings?
• Specify the roles and responsibilities of each member.
• How profits and losses will be distributed.
• How the LLC will be taxed. In Wisconsin, unless a different tax structure is specified in the agreement, such as an S-corp or C-corp, a single-member LLC will be taxed as a sole proprietorship and a multi-member LLC will be taxed as a partnership.

 Although it may look easy to do-it-yourself, it is well worth the money spent to consult with a legal professional to be sure it will pass muster if any problems should arise in the future.

The operating agreement should be kept at the principal office of the LLC.

Wisconsin-Specific Considerations

Final Thoughts & Next Steps

As we have seen, an operating agreement, although not required by Wisconsin law, may be the vital document you need for the smooth running of your business. Before conflicts arise, you have outlined how they will be resolved.

Take the next step and either consult legal counsel or think about using an online LLC formation service. At Tailor Brands, we assist you with the creation of your LLC. We also help you customize your operating agreement so it exactly fits the needs of your specific business. Get started today.

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