Suppose you’re starting a business and forming a limited liability company (LLC) in Arkansas. 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 will be made and how 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.
Without an operating agreement, Arkansas laws will apply by default, and disputes may have to be settled in court, which can have serious negative consequences for the business.
What Should the Arkansas Operating Agreement Include?
The Arkansas Operating Agreement acts as a blueprint for the internal functions and management of an LLC within the state. To safeguard its smooth operation and anticipate potential challenges, it’s essential to incorporate specific key components.
- Each member’s rights and responsibilities: In Arkansas, unless otherwise detailed in the operating agreement, all members have equal rights. Specify duties, expected contributions, and any other member-specific responsibilities.
- Capital contribution requirements for each member: Clearly document the value and type (monetary, property, services, etc.) of each member’s contribution to the LLC.
- Procedures for adding and removing members: Arkansas law allows flexibility in these procedures, so details should be explicitly stated, including any required approvals or conditions.
- Events affecting a member’s interest: Define the process if a member sells their interest, becomes incapacitated, dies, or faces bankruptcy. Consider addressing buyout provisions or buy-sell agreements.
Management and Voting:
- Management structure and roles of members: Specify if the LLC is member-managed or manager-managed. If not stated, Arkansas assumes member management.
- Voting rights of each member: Outline voting power, which can be proportional to ownership interest or another structure agreed upon by the members.
- Rules for meetings and voting: Define the frequency of meetings, quorum, notice requirements, and if remote voting is permitted.
- Managing potential conflicts of interest: A well-defined conflict-of-interest policy ensures members act in the best interest of the LLC.
- Allocation of profits, losses, and distributions: Typically aligned with ownership percentage, but this can be customized in the operating agreement.
- Provision for periodic financial audits or reviews: Outline frequency and responsibilities for conducting financial reviews.
- Tax treatment of the LLC: An Arkansas LLC can choose its federal tax classification, but this decision and any state-specific tax obligations should be recorded.
Changes and Amendments:
- Amending the operating agreement: Define the process, including any member voting requirements.
- Guidelines during transition events: Address protocols for leadership and operations during major transitions.
- Sale or merger conditions: Detail the process and member approvals required for significant actions like selling or merging the LLC.
Disputes, Legalities, and Policies:
- Dispute resolution: Arkansas recognizes alternative dispute resolution methods like arbitration. Specify the chosen process and any related procedures.
- Non-compete and confidentiality: While enforceability can vary, the agreement can outline expected behaviors regarding competition and information protection.
- Indemnification and liability limitation: Document provisions that protect members and managers from liability beyond their capital contributions.
Record Keeping and Communication:
- Record-keeping requirements: Arkansas mandates that LLCs maintain certain records. Specify where these records are kept and their accessibility.
- Decision documentation: Define the process for documenting and communicating major company decisions.
Company Information and Dissolution:
- Business purpose: While a broad purpose is acceptable in Arkansas, clarity can prevent potential disputes.
- Registered agent and office: An Arkansas LLC must have a registered agent within the state.
- Dissolution: Outline the procedures for voluntary dissolution, considering Arkansas’s requirements for notice and settling debts.
- Winding down: Detail the steps for liquidating the company’s assets and satisfying liabilities upon dissolution.
How to Draft an Arkansas 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 Arkansas laws.
This could cost anywhere from $500 to $2,500, but it could save you much more.
Certificate of Organization vs. Operating Agreement
The operating agreement should not be confused with your LLC’s certificate of organization. The certificate of organization officially forms your LLC with the state and includes no information about member roles or financial interests.
Also, the certificate of organization 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 Arkansas 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 Arkansas, 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 Arkansas?
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 Arkansas LLC does not have an operating agreement?
Arkansas default rules for LLCs will apply, but in cases of dispute, the law may be vague, and your members could end up in court.