Operating agreement compliance check

What

is an LLC Operating Agreement and Why Does it Matter? An operating agreement is the internal governing contract for a Limited Liability Company (LLC).

It defines critical aspects such as ownership, management structure, distribution of profits and losses, voting rights, procedures for adding or removing members, buy-sell provisions, and dissolution rules.

This document governs the internal affairs of the LLC and, when properly adopted, generally overrides the default rules set by state statutes. Once signed by the members, it acts as a binding contract.

Why Compliance Matters Having a well-drafted and compliant operating agreement is crucial for several reasons. It provides liability protection, ensures enforceability of internal rules, and helps avoid the often-unfavorable default rules that states impose when an LLC lacks its own agreement.

Filing, Notarization, and Public Record Typically, an operating agreement is an internal document and is not filed with the state. While notarization is generally not required, it can add evidentiary weight.

State requirements vary; some states may require a written agreement or specific recordkeeping. For instance, Delaware recognizes written, oral, or implied agreements, though a written agreement is standard practice for clarity and to reinforce limited liability.

State-Specific Compliance Highlights While most states do not require filing an operating agreement, many have specific compliance requirements for LLCs: California: LLCs doing business or organized in California must pay an annual tax of $800.

They also need to file a Statement of Information with the California Secretary of State to maintain active status. New York: Domestic LLCs must file a Biennial Statement with the NYS Department of State.

New domestic LLCs are subject to publication requirements, and failure to publish and file the Certificate of Publication within 120 days can lead to suspension of the LLC’s authority to conduct business.

Delaware: Delaware law recognizes that limited liability company agreements can be written, oral, or implied, and does not mandate execution. However, a written agreement is highly recommended for clarity.

Florida: Florida statutes address the effectiveness of operating agreement amendments and their relationship to filed records. For example, an amendment might be ineffective if required approvals are not met (F.S. 605.0107).

Illinois: Like many other states, Illinois requires LLCs to file annual reports to maintain their existence. Failure to file can result in delinquency, penalties, or administrative dissolution.

Texas: LLCs are formed by filing a Certificate of Formation, which must declare the management structure. The Secretary of State provides processes for filing and amending these documents.

Note: A few states, including California, Delaware, Maine, Missouri, and New York, are commonly cited as explicitly requiring an operating agreement. Always check specific state statutes and Secretary of State guidance for precise obligations.

Federal Tax and EIN Implications For federal tax purposes, the IRS classifies LLCs as corporations, partnerships, or disregarded entities, depending on elections made and the number of members. Single-member LLCs are typically treated as disregarded entities (meaning the owner reports LLC activity on their personal tax return) unless they elect corporate treatment by filing Form 8832.

An Employer Identification Number (EIN) is required if the LLC has employees or specific excise/employment tax obligations. Banks or states may also require an EIN.

Practical Operating Agreement Compliance Checklist To ensure your LLC remains compliant and its operating agreement effective, consider the following: Confirm Existence & Currency: Ensure you have a signed operating agreement.

If not, draft and adopt one promptly. Verify Form: The agreement should be in writing, signed by all members, dated, and stored with other core company records.

Amendments: Document all amendments in writing, ensuring they are signed by the required approvers as per the agreement and state law. Record the adoption date and maintain an amendment log.

Be aware of state statutory rules regarding amendment effectiveness. Officer/Member Records: Keep a ledger of members/managers, a schedule of capital contributions, membership interest percentages, and minutes or resolutions for all major actions.

Filing Requirements: Confirm and file all required state filings (e.g., annual/biennial reports, statements of information, publication where applicable) and pay any state LLC taxes or fees (e.g., California's $800 annual tax).

Tax/Election Checks: Confirm your federal tax classification, file Form 8832 if changing classification, obtain/confirm your EIN, and update bank accounts and vendor records to reflect the LLC's identity.

Contracts & Third Parties: Ensure all contracts, leases, bank accounts, and documents with lenders or investors accurately reflect the LLC's name and operating agreement authority. Obtain necessary signatures and record authorized signatories.

Transfer and Exit Rules: Verify that buy-sell, transfer, and membership withdrawal clauses are in place and have been followed for any transfers. Compliance Calendar: Create a calendar to track key dates such as state annual report due dates, tax payments, filing anniversaries, and member meeting dates, assigning responsibility for each.

Legal Review: For complex or state-specific issues (e.g., publication rules, notarization, franchise taxes, series LLCs, multi-state operations), consult a local corporate attorney or CPA. Common Mistakes & Remediation Common pitfalls include not having an operating agreement, having an unsigned or outdated one, maintaining inconsistent records, or failing to file required state reports.

Regularly reviewing and updating your agreement and compliance practices can mitigate these risks. Resources & Call to Action It is highly recommended to seek legal counsel for drafting or reviewing your operating agreement.

For additional resources, refer to the U.S. Small Business Administration (SBA), the IRS, and your specific state's Secretary of State website.

Consider downloading a compliance checklist or contacting a compliance service for tailored support. Caveats and Limitations: State laws are subject to change.

This information is based on authoritative sources available at the time of research. For precise, up-to-date legal obligations, always consult the specific state statute, Secretary of State guidance, and retain local counsel for complex matters.

Introduction: What is an LLC Operating Agreement and Why Does it Matter? An operating agreement is the internal governing contract for a Limited Liability Company (LLC).

It defines critical aspects such as ownership, management structure, distribution of profits and losses, voting rights, procedures for adding or removing members, buy-sell provisions, and dissolution rules.

This document governs the internal affairs of the LLC and, when properly adopted, generally overrides the default rules set by state statutes. Once signed by the members, it acts as a binding contract.

Why Compliance Matters Having a well-drafted and compliant operating agreement is crucial for several reasons. It provides liability protection, ensures enforceability of internal rules, and helps avoid the often-unfavorable default rules that states impose when an LLC lacks its own agreement.

Filing, Notarization, and Public Record Typically, an operating agreement is an internal document and is not filed with the state. While notarization is generally not required, it can add evidentiary weight.

State requirements vary; some states may require a written agreement or specific recordkeeping. For instance, Delaware recognizes written, oral, or implied agreements, though a written agreement is standard practice for clarity and to reinforce limited liability.

State-Specific Compliance Highlights While most states do not require filing an operating agreement, many have specific compliance requirements for LLCs: California: LLCs doing business or organized in California must pay an annual tax of $800.

They also need to file a Statement of Information with the California Secretary of State to maintain active status. New York: Domestic LLCs must file a Biennial Statement with the NYS Department of State.

New domestic LLCs are subject to publication requirements, and failure to publish and file the Certificate of Publication within 120 days can lead to suspension of the LLC’s authority to conduct business.

Delaware: Delaware law recognizes that limited liability company agreements can be written, oral, or implied, and does not mandate execution. However, a written agreement is highly recommended for clarity.

Florida: Florida statutes address the effectiveness of operating agreement amendments and their relationship to filed records. For example, an amendment might be ineffective if required approvals are not met (F.S. 605.0107).

Illinois: Like many other states, Illinois requires LLCs to file annual reports to maintain their existence. Failure to file can result in delinquency, penalties, or administrative dissolution.

Texas: LLCs are formed by filing a Certificate of Formation, which must declare the management structure. The Secretary of State provides processes for filing and amending these documents.

Note: A few states, including California, Delaware, Maine, Missouri, and New York, are commonly cited as explicitly requiring an operating agreement. Always check specific state statutes and Secretary of State guidance for precise obligations.

Federal Tax and EIN Implications For federal tax purposes, the IRS classifies LLCs as corporations, partnerships, or disregarded entities, depending on elections made and the number of members. Single-member LLCs are typically treated as disregarded entities (meaning the owner reports LLC activity on their personal tax return) unless they elect corporate treatment by filing Form 8832.

An Employer Identification Number (EIN) is required if the LLC has employees or specific excise/employment tax obligations. Banks or states may also require an EIN.

Practical Operating Agreement Compliance Checklist To ensure your LLC remains compliant and its operating agreement effective, consider the following: Confirm Existence & Currency: Ensure you have a signed operating agreement.

If not, draft and adopt one promptly. Verify Form: The agreement should be in writing, signed by all members, dated, and stored with other core company records.

Amendments: Document all amendments in writing, ensuring they are signed by the required approvers as per the agreement and state law. Record the adoption date and maintain an amendment log.

Be aware of state statutory rules regarding amendment effectiveness. Officer/Member Records: Keep a ledger of members/managers, a schedule of capital contributions, membership interest percentages, and minutes or resolutions for all major actions.

Filing Requirements: Confirm and file all required state filings (e.g., annual/biennial reports, statements of information, publication where applicable) and pay any state LLC taxes or fees (e.g., California's $800 annual tax).

Tax/Election Checks: Confirm your federal tax classification, file Form 8832 if changing classification, obtain/confirm your EIN, and update bank accounts and vendor records to reflect the LLC's identity.

Contracts & Third Parties: Ensure all contracts, leases, bank accounts, and documents with lenders or investors accurately reflect the LLC's name and operating agreement authority. Obtain necessary signatures and record authorized signatories.

Transfer and Exit Rules: Verify that buy-sell, transfer, and membership withdrawal clauses are in place and have been followed for any transfers. Compliance Calendar: Create a calendar to track key dates such as state annual report due dates, tax payments, filing anniversaries, and member meeting dates, assigning responsibility for each.

Legal Review: For complex or state-specific issues (e.g., publication rules, notarization, franchise taxes, series LLCs, multi-state operations), consult a local corporate attorney or CPA. Common Mistakes & Remediation Common pitfalls include not having an operating agreement, having an unsigned or outdated one, maintaining inconsistent records, or failing to file required state reports.

Regularly reviewing and updating your agreement and compliance practices can mitigate these risks. Resources & Call to Action It is highly recommended to seek legal counsel for drafting or reviewing your operating agreement.

For additional resources, refer to the U.S. Small Business Administration (SBA), the IRS, and your specific state's Secretary of State website.

Consider downloading a compliance checklist or contacting a compliance service for tailored support. Caveats and Limitations: State laws are subject to change.

This information is based on authoritative sources available at the time of research. For precise, up-to-date legal obligations, always consult the specific state statute, Secretary of State guidance, and retain local counsel for complex matters.