Suppose you’re starting a business and forming a limited liability company (LLC) in Idaho. 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, Idaho 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 Idaho Operating Agreement Include?
The Idaho Operating Agreement lays the foundation for the internal operations of an LLC in the state. Grasping its key inclusions is vital for efficient management and addressing possible challenges.
- Each member’s rights and responsibilities: In Idaho, unless the operating agreement specifies otherwise, each member has an equal right to participate in the management of the LLC. Define specific roles, duties, and obligations for clarity.
- Capital contribution requirements for each member: Clearly detail the amount, nature, and timing of initial and any subsequent contributions of each member to the LLC.
- Procedures for adding and removing members: Designate the protocols and criteria for joining and exiting the LLC. Unless the operating agreement states otherwise, unanimous consent is typically needed in Idaho.
- What happens when a member sells their interest, becomes disabled, or dies: Create buy-sell provisions to clarify the procedures for such eventualities.
- Conditions under which a member might become bankrupt or insolvent: Define consequences and actions to be taken should a member face financial hardships.
Management and Voting:
- Management structure and roles of members: Determine whether the LLC is member-managed or manager-managed. Specify roles and responsibilities in line with the choice.
- Voting rights of each member: In Idaho, unless otherwise defined, each member’s voting power is proportional to their share in the LLC.
- Rules for meetings and voting: Define the frequency, notice requirements, and voting protocols for member meetings.
- Rules for managing potential conflicts of interest among members: Describe the processes for identifying, disclosing, and addressing any conflicts.
- Allocation of profits, losses, and distributions: While Idaho defaults to distributing based on a member’s share in the LLC, custom allocations can be outlined in the operating agreement.
- Provision for periodic financial audits or reviews: State when and how financial reviews or audits will occur.
- Tax treatment of the LLC: Identify the chosen tax classification (e.g., pass-through, corporation) for the LLC.
Changes and Amendments:
- Process for amending the operating agreement: Describe the method and requirements (like voting thresholds) for updating the agreement.
- Guidelines for company management during transition events: Set protocols for significant business changes or leadership transitions.
- Conditions under which the LLC might be sold or merged: Document processes and conditions for significant business decisions, such as mergers or acquisitions.
Disputes, Legalities, and Policies:
- Clauses for dispute resolution or mediation: To potentially avoid lengthy court proceedings in Idaho, consider including a mediation or arbitration clause.
- Guidelines for non-compete and confidentiality agreements: Ensure any non-compete clauses are reasonable in scope, duration, and geography to be enforceable in Idaho.
- Provision for indemnification and limitation of liability: Define protections for members/managers acting in good faith on the LLC’s behalf.
Record Keeping and Communication:
- Details about record keeping requirements: Ensure records are kept in line with Idaho’s standards, documenting essential activities and decisions of the LLC.
- Guidelines for how company-related decisions will be communicated: Establish best practices for relaying decisions, notices, or updates to members.
Company Information and Dissolution:
- Description of the business’s purpose and activities: Clearly state the primary objectives and operations of the LLC.
- Identification of the registered agent and office: As per Idaho requirements, every LLC must have a designated registered agent within the state.
- Procedures for dissolving the LLC: Outline steps in line with Idaho’s dissolution procedures, which include settling liabilities and distributing remaining assets.
- Procedures for winding down or liquidating the company’s assets: Describe the method of asset distribution among members upon dissolution.
How to Draft an Idaho 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 Idaho 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 Idaho 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 Idaho, 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 Idaho?
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 Idaho LLC does not have an operating agreement?
Idaho default rules for LLCs will apply, but in cases of dispute, the law may be vague, and your members could end up in court.