Suppose you’re starting a business and forming a limited liability company (LLC) in Georgia. 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 significant 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.
Without an operating agreement, Georgia 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 Georgia Operating Agreement Include?
The Georgia Operating Agreement underlines the internal rules for an LLC within the state. Being well-versed with its essential elements ensures proficient operation and sidesteps potential disputes.
- Each member’s rights and responsibilities: Define each member’s roles, entitlements, duties, and any specific obligations. Remember, in Georgia, unless otherwise stated in the operating agreement, all members have equal rights to participate in management.
- Capital contribution requirements for each member: Document the amount, nature, and timing of initial and future contributions by each member.
- Procedures for adding and removing members: Specify criteria for adding or removing members. By default in Georgia, adding members typically requires the consent of existing members.
- What happens when a member sells their interest, becomes disabled, or dies: Set forth buy-sell provisions detailing processes for membership transfer, buyout, and continuation.
- Conditions under which a member might become bankrupt or insolvent: Define the implications and processes if a member faces bankruptcy or insolvency.
Management and Voting:
- Management structure and roles of members: Decide and indicate if the LLC is member-managed or manager-managed. Georgia allows for both structures.
- Voting rights of each member: By default in Georgia, voting is proportional to a member’s interest in the LLC. However, custom allocations can be stipulated in the agreement.
- Rules for meetings and voting: Lay out notice requirements, meeting schedules, quorum rules, and voting procedures.
- Rules for managing potential conflicts of interest among members: Create protocols to disclose and handle potential conflicts.
- Allocation of profits, losses, and distributions: Georgia defaults to allocations based on a member’s share in the LLC. However, custom allocations can be outlined in the operating agreement.
- Provision for periodic financial audits or reviews: Specify if and when financial audits will occur, and by whom.
- Tax treatment of the LLC: While LLCs in Georgia are typically treated as pass-through entities for tax purposes, you can opt for different classifications.
Changes and Amendments:
- Process for amending the operating agreement: Describe procedures, voting thresholds, and any other necessary requirements.
- Guidelines for company management during transition events: Articulate protocols for leadership transitions or significant business shifts.
- Conditions under which the LLC might be sold or merged: Set standards and procedures for significant corporate actions.
Disputes, Legalities, and Policies:
- Clauses for dispute resolution or mediation: Consider a provision for mediation or arbitration in Georgia to mitigate potential litigation costs.
- Guidelines for non-compete and confidentiality agreements: While non-compete agreements are enforceable in Georgia, they must be reasonable in time, geography, and scope.
- Provision for indemnification and limitation of liability: Spell out the extent of protections for members and managers acting on the LLC’s behalf.
Record Keeping and Communication:
- Details about record keeping requirements: Ensure adherence to Georgia’s requirement for LLCs to maintain certain records like lists of members, operating agreements, tax returns, and more.
- Guidelines for how company-related decisions will be documented or communicated: Establish consistent communication and documentation practices.
Company Information and Dissolution:
- Description of the business’s purpose and activities: While not mandatory in Georgia, it’s good practice to articulate the company’s mission.
- Identification of the registered agent and office: Georgia mandates LLCs to maintain a registered agent and office in the state.
- Procedures for dissolving the LLC: Align with Georgia’s LLC dissolution guidelines, which include settling debts, asset distribution, and filing necessary paperwork.
- Procedures for winding down or liquidating the company’s assets: Determine the method for distributing assets upon the LLC’s end.
How to Draft a Georgia 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.
Consider having an attorney draw up your operating agreement if your business has multiple members. An attorney will ensure that all bases are covered, and all members’ rights are protected. They can also include language that is specific to Georgia laws.
This could cost anywhere from $500 to $2,500, but it could save you much more.
Articles of Organization vs. Operating Agreement
The operating agreement should not be confused with your LLC’s articles of organization. The articles of organization officially form your LLC with the state and include no information about member roles or financial interests.
Also, the articles of organization are filed with the state and part of the public record, while an operating agreement is kept in your LLC’s records and referred to as needed.
Keep Your Georgia 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 entirely 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 Georgia, 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 Georgia?
No, operating agreements do not have to be notarized. They are not filed with the state, just kept in your records.
What happens if a Georgia LLC does not have an operating agreement?
Georgia default rules for LLCs will apply, but in cases of dispute, the law may be vague, and your members could end up in court.