Suppose you’re starting a business and forming a limited liability company (LLC) in Alabama. In that case, you’re not required to have an operating agreement, but it’s a good idea to have one in your records.
An operating agreement is particularly important if your LLC has more than one owner, or member, as it establishes ownership shares, profit and loss distributions, and member roles and responsibilities.
Why You Need an Operating Agreement
A smartly drafted operating agreement can help you in many situations, such as when your LLC merges with another business or a member is no longer capable of working.
The operating agreement establishes each member’s ownership share in the LLC, profit and loss distribution percentages, and how proceeds will be divided if the business is sold. An operating agreement also defines how decisions and member disputes will be resolved.
It also defines each member’s role and responsibilities and how the LLC is managed, clarifying who oversees which aspects of LLC operations.
Alabama laws will apply by default without an operating agreement, and disputes may have to be settled in court, which can have serious negative consequences for the business.
What Should the Alabama Operating Agreement Include?
Drafting an Operating Agreement in Alabama provides clarity and structure for LLCs within the state. Understanding its essential elements ensures seamless business operations and legal compliance.
- Each member’s rights and responsibilities: This section should outline the scope of authority, duties, and responsibilities that each member has in the company.
- Capital contribution requirements for each member: Specify the amount or value each member contributes to the LLC and what they receive in exchange (usually a percentage ownership).
- Procedures for adding and removing members: Describe the process for bringing in new members or removing existing ones. This could include buy-in or buy-out clauses and Alabama-specific legal requirements for admission of new members.
- What happens when a member sells their interest, becomes disabled, or dies: Address procedures like right of first refusal, buyout terms, or potential successor members.
- Conditions under which a member might become bankrupt or insolvent: Determine how the LLC will respond in such situations. For instance, the LLC might have the right to buy out the insolvent member’s interest.
Management and Voting:
- Management structure and roles of members: Define whether the LLC is member-managed or manager-managed and specify roles and duties accordingly.
- Voting rights of each member: Clarify whether voting rights are proportional to ownership percentage or if there are other arrangements.
- Rules for meetings and voting: Set forth guidelines for conducting meetings, including notice requirements, quorum, and Alabama-specific voting rules.
- Rules for managing potential conflicts of interest among members: This could include disclosure requirements and procedures for handling conflicts.
- Allocation of profits, losses, and distributions: Generally, it’s based on ownership percentages, but other arrangements can be made.
- Provision for periodic financial audits or reviews: Decide on how often the company’s finances will be audited or reviewed.
- Tax treatment of the LLC: Alabama LLCs default to pass-through taxation, but members may elect corporate taxation.
Changes and Amendments:
- Process for amending the operating agreement: Outline how members can propose and vote on changes.
- Guidelines for company management during transition events: Specify steps the LLC should take during major changes, like mergers or acquisitions.
- Conditions under which the LLC might be sold or merged: Describe scenarios and processes for selling or merging the LLC.
Disputes, Legalities, and Policies:
- Clauses for dispute resolution or mediation: Propose procedures like mediation or arbitration before litigation in Alabama courts.
- Guidelines for non-compete and confidentiality agreements: Detail the expectations around proprietary information and restrictions on members’ business activities.
- Provision for indemnification and limitation of liability: Specify the conditions where members might be indemnified by the LLC.
Record Keeping and Communication:
- Details about record keeping requirements: Align with Alabama’s record-keeping statutes and ensure that members have access to essential documents.
- Guidelines for how company-related decisions will be documented or communicated: State whether decisions are documented in meeting minutes, written consents, or other forms.
Company Information and Dissolution:
- Description of the business’s purpose and activities: Clearly describe the company’s business activities.
- Identification of the registered agent and office: The LLC must have a registered agent and office in Alabama.
- Procedures for dissolving the LLC: Describe the steps for dissolving the LLC as per Alabama law.
- Procedures for winding down or liquidating the company’s assets: Outline how assets will be distributed among members upon dissolution.
How to Draft an Alabama Operating Agreement
You can find operating agreement templates online from services like ZenBusiness, which will ensure the standard legal language and allow you to fill in the blanks. You’ll probably be able to find free templates online as well, but it’s advisable not to use those as they may include errors.
If your business has multiple members, you should consider having an attorney draw up your operating agreement. An attorney will ensure that all bases are covered, and all members’ rights are protected. They can also include language that is specific to Alabama laws.
This could cost anywhere from $500 to $2,500, but it could save you much more.
Certificate of Formation vs. Operating Agreement
The operating agreement should not be confused with your LLC’s certificate of formation. The certificate of formation officially forms your LLC with the state and includes no information about member roles or financial interests.
Also, the certificate of formation is filed with the state and is part of the public record, while an operating agreement is kept in your LLC’s records and referred to as needed.
Keep Your Alabama Operating Agreement Up to Date
It’s a good idea to review your operating agreement periodically. Circumstances change, and the safest approach is to ensure your operating agreement is fully up to date. Generally, your operating agreement will state that members have to vote to approve amendments to the operating agreement.
Don’t Skip the Operating Agreement
You’re not required to have an operating agreement in Alabama, but the wise entrepreneur would never do business without one. It’s a document that could be critical to the future of your business. You may think a dispute will never arise, but times and people change. You don’t want to end up in a bitter court battle because you pushed off creating an operating agreement.
It’s a document that will protect the rights and interests of your LLC members and ensure smooth, continued operations in the event of any unexpected hurdles or pitfalls.
Does an LLC operating agreement need to be notarized in Alabama?
No, operating agreements do not have to be notarized. They are not filed with the state, just kept in your records.
What happens if an Alabama LLC does not have an operating agreement?
Alabama default rules for LLCs will apply, but in cases of dispute, the law may be vague, and your members could end up in court.