The Operating Agreement is the critical document to your organization. It determines HOW your company operates day to day. This document is unique to your company and can be tailored specifically to meet your company’s needs. However, you must keep in mind that “an operating agreement may contain any provisions regarding the affairs of a limited liability company and the conduct of its business to the extent that such provisions are not inconsistent with the laws of the Commonwealth or the articles of organization” (Va Code § 13.1-1023(A)(1)). In designing this document, you will need to keep in mind that certain duties and provisions that cannot be waived.
- Legality. This should go without saying, but your business must engage in legal activities within the Commonwealth. Even the best-drafted operating agreement will not allow you to operate a business that trades in illegal goods or services.
- Fiduciary Duty. Fiduciary duty to the company is perhaps the highest duty owed. Your fiduciary duties include the duty of loyalty and the duty of care. In essence, you are required to act in the best interest of the company regardless of your self-interest using your best business judgment. This is critical and cannot be waived in the operating agreement. While the members of an LLC and the LLC itself will likely have overlapping interests, particularly for small businesses, it is important to keep in mind that you have a duty to the Company first and foremost.
- Management Authority. The operating agreement will typically set up the manager structure of the company, whether it may be a member-manager company (driven by the ownership) or a manager-managed company, governed by an appointed manager. While this can be achieved in several different ways, the operating agreement must design some sort of management structure. The operating agreement cannot eliminate the requirement for management or decision-making, though it can be crafted to de-centralize the decision-making powers.
- Right to Dissociate. Members of the Company maintain a right to dissociate themselves from the company. This cannot be waived by the operating agreement, although the operating agreement can and should set forth a procedure for any existing members.
- Dissolution of the Company. While most companies are created for a perpetual duration, a good operating agreement will address the process of dissolution when and if a company ceases operations.
- Amendment. An operating agreement must be able to be amended and changed from time to time. The company can determine how the operating agreement can be amended and how many members must approve of any changes. For example, requiring the consent of all members in order to make an amendment can be an effective way to block nearly all changes, except for those with unanimous support.
- Allocation of Profits and Losses. Most companies will use the operating agreement to determine how profits and losses are determined. There are certain restrictions on how profits and losses should be allocated, particularly if the LLC has elected partnership taxation. While the operating agreement can provide flexibility in this area, it must still comply with the basic principles of tax law.
- Annual Reporting. Virginia requires that limited liability companies file an annual report with the State Corporation Commission to remain in good standing. The report requires a fee, currently set at $100.00 per year. The filing of this report cannot be waived by the Operating Agreement. The same is true for any other local, administrative requirements that businesses may be required to adhere to.
The operating agreement is the foundation of your business. It is important to ensure that it is tailored to your unique business needs while complying with the law. Contact the attorneys at Way Law today if you have questions about what should be (and what shouldn’t be!) in this important document.