Suppose you’re starting a business and forming a limited liability company (LLC) in Illinois. 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, Illinois 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 Illinois Operating Agreement Include?
The Illinois Operating Agreement structures the inner workings of an LLC within the state. Awareness of its fundamental components ensures smooth operation and readies for potential disputes.
- Each member’s rights and responsibilities: Clearly specify roles, expectations, and any unique duties of each member. In Illinois, unless specified otherwise, all members have an equal say in management.
- Capital contribution requirements for each member: Clearly document the amount, nature, and timing of contributions of each member.
- Procedures for adding and removing members: While Illinois law requires unanimous consent to admit new members, you can specify different procedures in the operating agreement.
- What happens when a member sells their interest, becomes disabled, or dies: Have a buy-sell agreement or provisions in place detailing how a member’s interest will be handled in such scenarios.
- Conditions under which a member might become bankrupt or insolvent: Define any steps or consequences if a member faces these financial challenges.
Management and Voting:
- Management structure and roles of members: Determine if the LLC will be member-managed or manager-managed. Outline respective roles accordingly.
- Voting rights of each member: Unless specified otherwise in Illinois, voting is typically based on the member’s percentage of interest in the LLC.
- Rules for meetings and voting: Detail how often meetings occur, the required notice, quorum, and any specific protocols for voting.
- Rules for managing potential conflicts of interest among members: Define protocols for transparency and resolution in potential conflicts.
- Allocation of profits, losses, and distributions: While Illinois defaults to allocations based on a member’s interest, you can define custom allocations in the agreement.
- Provision for periodic financial audits or reviews: Specify when and how the LLC’s finances will be reviewed or audited.
- Tax treatment of the LLC: Determine if the LLC will be taxed as a sole proprietorship, partnership, or corporation.
Changes and Amendments:
- Process for amending the operating agreement: Set forth the requirements and procedures for making changes to the agreement.
- Guidelines for company management during transition events: Define management strategies and protocols during major transitions.
- Conditions under which the LLC might be sold or merged: Outline the procedures and requirements for significant business decisions.
Disputes, Legalities, and Policies:
- Clauses for dispute resolution or mediation: Consider including an alternative dispute resolution clause, which can be more efficient than going through Illinois courts.
- Guidelines for non-compete and confidentiality agreements: Ensure any non-compete clauses are reasonable to be enforceable in Illinois.
- Provision for indemnification and limitation of liability: Offer protections for members or managers when they act in good faith for the LLC.
Record Keeping and Communication:
- Details about record keeping requirements: Illinois requires certain records to be kept, but further specifics can be laid out in the operating agreement.
- Guidelines for how company-related decisions will be documented or communicated: Determine the preferred communication methods and documentation standards.
Company Information and Dissolution:
- Description of the business’s purpose and activities: State the LLC’s objectives and primary operations.
- Identification of the registered agent and office: As required in Illinois, provide the details of the designated registered agent and the office address.
- Procedures for dissolving the LLC: Outline the steps in accordance with Illinois law on how the LLC will be dissolved, ensuring debts and obligations are settled.
- Procedures for winding down or liquidating the company’s assets: Describe how assets will be liquidated and how proceeds will be distributed among members.
How to Draft an Illinois 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 Illinois 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 Illinois 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 Illinois, 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 Illinois?
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 Illinois LLC does not have an operating agreement?
Illinois default rules for LLCs will apply, but in cases of dispute, the law may be vague, and your members could end up in court.