What Is a Missouri LLC Operating Agreement?
An operating agreement is like the manual for your Missouri business; it describes the rules that will be followed internally to ensure a business runs smoothly. An LLC operating agreement outlines each member’s financial interest (capital contributions) in the company and administrative rules for ownership changes, responsibilities of members, how profits will be distributed and how the LLC will be managed, among other things. Since running a Missouri LLC without an operating agreement requires the LLC members to accept Missouri statutes by default, every Missouri LLC should have its own . Today, here are the basics of Missouri LLC operating agreements.
A Missouri operating agreement for an LLC is a contract between the LLC and its members that establishes the members’ rights and duties. These rights and duties are guided by the following principles that apply to members and managers: The operating agreement allows the members to decide for themselves whether and how to modify any of these principles, and provides clearer guidelines for ease of decision-making down the road.
Important Sections of a Missouri LLC Operating Agreement
Before we discuss the components, let’s understand that an operating agreement allows member’s and managers to enter into any type of agreement they agree to so long as the agreement is not expressly prohibited by statute. The provisions that are typically found in a Missouri LLC operating agreement are as follows:
· Member’s roles and responsibilities in the operation of the company
· Each member’s capital account and the changes, if any, that are likely to occur to each capital account. For example, member A converts their capital account into an ownership interest.
· Allocation of profits, losses and distributions, if any. Under Missouri law, a member can be required to contribute to the losses and expenses of the company. This provision would set forth how that will work and at what times(s) that the expenses and losses must be contributed by each member.
· Capital contributions. This provision contains an outline for each member regarding what is required and when it is required. Using the example above, using a series of e-mails back and forth would cause confusion. Having this provision in place will help alleviate the confusion.
· What occurs upon termination of the company. This outlines when the company can begin selling off its assets and winding down its affairs and distributing the proceeds. This will also include a provision that requires that any distributions of cash will be made in accordance with the members percentage share in the company. Have you asked who receives distributions prior to termination of the company? If you have not, you will without a doubt end up in disputes.
· Indemnification and contribution rights among members may be included as well. This determines who will be required to indemnify whom in the event that one member is harmed during the course of doing business with third parties.
· As discussed above there are many other issues or concerns that may be addressed in the agreement. This is the members opportunity to put everything that they think is important and should be agreed upon to avoid future litigation.
How to Draft an Operating Agreement for Your Missouri LLC
When you form a Missouri LLC, the first document you’ll draft is a Missouri articles of organization, which establishes the existence of your business. But then, the LLC members will start talking about how the company will be managed. In a large and complex company, there will be lots of machinery in place to deal with that question. But what about for a small business, run by just one or two people? Often, that small business will need the framework of a formal document that sets out the rules and guidelines that govern how the LLC operates. If you’re forming a Missouri limited liability company, this document is called an operating agreement.
Because it lays out how the members and managers will operate the business, an LLC operating agreement can address a number of issues, including how much the owners invest, how profits and losses are shared, how decisions are made, and what happens if a member wants to leave the company or the company needs to be dissolved.
So how do you create a Missouri LLC operating agreement?
Gather Information To create an LLC operating agreement, you will need to gather information both about the members and the business:
Complete the Document To create the LLC operating agreement, you’ll want to draft a document using all the information you gathered in the previous steps. Although you may want to create a comprehensive document that addresses all possible scenarios, it doesn’t have to be. The operating agreement should primarily reflect the particular operating needs of your company, so feel free to omit sections that don’t apply to your company and include new sections that address your unique requirements. You can find plenty of LLC operating agreement templates online to help get you started.
Have Members Review the Agreement If the LLC has multiple members, have each member review the document separately, and allow them to make changes and suggest additions they feel are necessary. Once the revisions have been finalized, schedule a meeting where all members can sign the document.
Keep the Document Handy Once you’ve created the operating agreement, keep it in a safe place. Although you do not have to submit it to any state department, you should always be able to easily access the document.
What Not to Do
Common mistakes that LLC owners make when creating a Missouri LLC Operating Agreement form
Despite the multitude of templates and tips available on the internet, many common mistakes occur when it comes to create an LLC Operating Agreement form. For starters, one of the biggest mistakes LLC owners make in their Operating Agreement is failing to consider it at all. Oftentimes, LLC owners operate under the mistaken belief that a formal Operating Agreement isn’t legally necessary—especially if their LLC has been formed as a single-member business entity. However, it’s important to understand that all limited liability companies require an Operating Agreement to outline their ownership structure and operating terms. On the other hand, LLC members who do create an Operating Agreement may take a one-size-fits-all approach that could prove problematic down the road. Operating Agreement templates are generally based on the requirements of a trove of other states, not on the specific needs of Missouri residents. If you own a Missouri LLC, it’s highly recommended that you work with an experienced attorney to ensure that your Operating Agreement complies with local laws and regulations while meeting your business’s unique needs. Once you have decided to create a Missouri Operating Agreement , you’ll need to be careful to avoid any common missteps that could expose your newly formed LLC to liability issues. One of the most common issues is failing to clearly spell out the rights and duties of each LLC member. Each member should have a clear set of rights and obligations in order to avoid future disagreements. Sometimes, individuals will make the decision to form a single-member LLC for simplicity’s sake, but this can lead to greater liability exposure if it’s never updated in the future when a second business partner — usually a spouse — is added to the business. Another common mistake business partners make when crafting their LLC Operating Agreement is to fail to properly title and distribute ownership. The Operating Agreement should detail exactly who owns what percentage of the LLC—and it should include a plan in the event of a member’s departure. Finally, membership interests should be recorded in an Operating Agreement, and it is also important to make sure that all members receive a copy of their Operating Agreement to keep for their records.
Amending and Updating Your Operating Agreement
The operating agreement of your Missouri limited liability company is likely to contain a provision that allows it to be modified or amended. In fact, under Missouri state law, your operating agreement is not even required to be in writing. Therefore, any amendments or updates can be made verbally (or even through the actions of the members). However, if every change to your operating agreement is going to be done verbally or through actions of the members, keeping them in writing will provide a more risk-averse structure.
The first question to consider is how routinely the operating agreement will be updated. If the business established by your LLC is expected to undergo substantial changes every few years, then it may be preferable to formally amend your operating agreement in writing for each of those changes. For example, if your LLC’s profits are going to significantly increase every two years because of the acquisition of new real estate, or if you are going to be receiving large capital contributions every year to fund the expansion of an office, it is very important to be clear about how those distributions will be handled—as well as any economic value that will be diluted because of the issuance of new membership interests.
If your LLC is like most, however, it will not have substantial changes every year. In that instance, a periodic (e.g., every five years) review and revision of your operating agreement will be sufficient to keep it up to date with current members and procedures. These periodic reviews are also an opportunity to remove any "trapdoors" or ambiguities in your operating agreement that could lead to costly legal battles in the future.
We recommend creating a checklist that outlines substantial changes in the owner’s or company’s actions each year (e.g., any class of member being removed, addition of a new class of member, change in distribution or allocation procedure, etc.). This checklist is the start of what will be an "amendment". From there, the language can be crafted into a final written form that is consistent with all past amendments. In some cases, those past amendments will need to be combined and restated into a single amendment.
Once the amendment is complete, it should be reviewed by the LLC members with an eye toward the ramifications for existing members. Is someone’s ownership interest or rights being diluted? Will there be any changes to the distributions they are entitled to under the existing operating agreement? What sort of class actions or voting rights (if any) need to be outlined in the amendment to ensure that their relative rights are not harmed by the amendment(s)?
In sum, revisions and amendments are a normal part of running a company, and certainly are for a Missouri limited liability company.
Questions and Answers on Missouri LLC Operating Agreements
The Operating Agreement for an LLC is key to your limited liability company. Unfortunately, there are many questions about it. The answers below should help you understand the basics.
What is an Operating Agreement?
An Operating Agreement is the blueprint for how your LLC will operate. It sets the rules you and your LLC members will follow. An Operating Agreement can be thought of as a contract between you (and other members) and your LLC.
What happens if I do not have an Operating Agreement in Missouri?
By default, Missouri law provides the rules that apply in most operating situations. But sometimes these "default rules" don’t work well . It can be easier to choose your own rules (like how to deal with dead members). So even though Missouri law provides default rules, you are usually better off having your own set of rules.
Can I really create an LLC Operating Agreement in Missouri myself?
Yes, if you understand the important rules created by Missouri law. However, most people prefer to have an attorney create their LLC Operating Agreement.
Do I need a lawyer to create my LLC Operating Agreement?
No! Any adult can create an Operating Agreement without a lawyer. But there is a lot of information to cover and most people like to have help.