Watching your business grow and develop is very satisfying, but it may mean changes that affect its formal structure. If you have a limited liability company, you need to be aware of the common reasons to amend your LLC operating agreement. Get into the habit of reviewing your agreement after any significant company event. Once you have consent of all current members, you can amend it to reflect the changes.
We’ll take you through what you need to know about your LLC operating agreement and the reasons you may need to make changes to it.
What is an LLC Operating Agreement?
First thing's first: An LLC operating agreement is a legal document that sets out the ownership and membership duties of a limited liability company (LLC). The agreement outlines the financial and working relations among business owners (referred to as “members") and between members and managers. You are legally obliged to have an LLC operating agreement if your business is based in California, Delaware, Maine, Missouri, Nebraska, or New York.
Even if your business is not based in one of those states, however, you are strongly advised to have an LLC operating agreement for the following reasons:
- If it’s a multi-member LLC (i.e., you have business partners), an operating agreement helps to avoid misunderstandings by clarifying partner roles and responsibilities.
- If it’s a single-member LLC (i.e., you are the sole owner), an operating agreement gives your LLC credibility and helps to reinforce its limited liability status in the courts.
Why Might You Need to Amend Your Agreement?
The general rule of thumb is that if you change any information in your initial formation documents, you should file an amendment to those documents. Perhaps you want to pass your business on to your children, and you want to authorize and issue non-voting stock beforehand. Or maybe you want to change from a member-managed LLC to a manager-managed LLC. These are both reasons why you should file an amendment.
You likely won’t have to file amending documents with the state if you are simply altering provisions in the LLC's operating agreement. If you ever choose to incorporate, however, you will need to meet higher compliancy standards as most states demand considerably more information in the articles of incorporation than they do in an LLC's formation documents.
Here are some common reasons to file an amendment:
- Your LLC name changes.
- Your LLC’s purpose changes.
- You add a new member—or one leaves.
- Your board of managers change.
- You invest more capital in the business.
- You make any other managerial/financial changes outlined in the original operating agreement.
How Do You Amend Your Operating Agreement?
Amending your LLC’s Operating Agreement is not difficult. Members simply need to approve the changes and then document it. To protect the confidentiality of the information, make sure all members sign a non-disclosure agreement.
Your operating agreement may contain instructions for making changes. Perhaps you need all members to agree to any changes, or maybe you just need a simple majority. Be sure to follow whatever rules are included in the initial agreement, or your amendment may not be valid.
Creating your amendment is simple. You will need a written document stating that you are modifying the existing operating agreement and setting out the amendment as clearly as possible. Ensure that each member (or approving member) signs the amendment and then keep it with your other official company documents.
It’s easy to keep LLC documentation current, but it is also very easy to overlook these kinds of administrative tasks when you are busy trying to run a growing business. It is worth taking the time to ensure your LLC operating agreement is accurate, however. You’ll remain compliant with the state, and avoid disputes (or even lawsuits) with members.