Suppose you’re starting a business and forming a limited liability company (LLC) in Indiana. 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, Indiana 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 Indiana Operating Agreement Include?
The Indiana Operating Agreement delineates the inner workings and governance structures of an LLC within the state. Familiarizing oneself with its essential components is vital to ensuring seamless operations and preempting potential disputes.
- Each member’s rights and responsibilities: Outline the specific roles, duties, and expectations of each member, ensuring alignment with Indiana’s LLC Act unless explicitly stated otherwise.
- Capital contribution requirements for each member: Specify the amount and type of contribution each member provides initially and any future contributions if expected.
- Procedures for adding and removing members: Clearly state the process for admitting new members or dealing with a member’s exit. This could be based on unanimous consent, majority vote, etc.
- What happens when a member sells their interest, becomes disabled, or dies: Discuss mechanisms like right of first refusal or mandatory buyout provisions.
- Conditions under which a member might become bankrupt or insolvent: Address how the LLC will deal with a member’s bankruptcy or insolvency, potentially leading to their dissociation.
Management and Voting:
- Management structure and roles of members: Indiana allows both member-managed and manager-managed LLCs. Be clear about which structure your LLC adopts.
- Voting rights of each member: Typically based on ownership percentage but can be customized.
- Rules for meetings and voting: Specify when and how regular and special meetings are held, what constitutes a quorum, and the required vote for various decisions.
- Rules for managing potential conflicts of interest among members: Implement provisions to avoid potential conflicts, ensuring fairness and transparency.
- Allocation of profits, losses, and distributions: Default is typically based on ownership percentage, but other allocation methods can be agreed upon.
- Provision for periodic financial audits or reviews: Detail if and when financial audits will occur to maintain transparency.
- Tax treatment of the LLC: By default, LLCs have pass-through taxation, but members can elect for different treatments, such as being taxed as a corporation.
Changes and Amendments:
- Process for amending the operating agreement: Typically requires a supermajority or unanimous vote, but you can specify your preference.
- Guidelines for company management during transition events: Detail how the company will operate during significant transitions like the exit of a key member.
- Conditions under which the LLC might be sold or merged: Outline the necessary approval processes.
Disputes, Legalities, and Policies:
- Clauses for dispute resolution or mediation: Having a process in place can prevent costly court battles. Consider mandating arbitration or mediation for internal disputes.
- Guidelines for non-compete and confidentiality agreements: While Indiana law respects these agreements, they must be reasonable in scope and duration.
- Provision for indemnification and limitation of liability: Specify scenarios in which members or managers might be protected from personal liability.
Record Keeping and Communication:
- Details about record keeping requirements: Define the types of records to maintain, including financial and membership records, in line with Indiana state requirements.
- Guidelines for how company-related decisions will be documented or communicated: This can include meeting minutes, written resolutions, etc.
Company Information and Dissolution:
- Description of the business’s purpose and activities: Although not mandatory in Indiana, defining the business’s purpose can provide clarity.
- Identification of the registered agent and office: Mandatory for Indiana LLCs. Clearly identify who will act as the registered agent and the office’s location.
- Procedures for dissolving the LLC: Describe the steps for dissolving the LLC, ensuring compliance with Indiana dissolution procedures.
- Procedures for winding down or liquidating the company’s assets: Detail how the LLC will settle debts, distribute remaining assets, and wrap up any final business matters.
How to Draft an Indiana 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 Indiana 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 Indiana 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 Indiana, 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 Indiana?
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 Indiana LLC does not have an operating agreement?
Indiana default rules for LLCs will apply, but in cases of dispute, the law may be vague, and your members could end up in court.