Suppose you’re starting a business and forming a limited liability company (LLC) in Iowa. 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, Iowa 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 Iowa Operating Agreement Include?
The Iowa Operating Agreement outlines the foundational guidelines for managing and operating an LLC in the state. Understanding its core elements is crucial for streamlined business functions and to address any potential issues proactively.
- Each member’s rights and responsibilities: Specify each member’s roles, duties, and expectations in accordance with Iowa’s LLC laws. Members typically have the right to participate in the management and share profits and losses.
- Capital contribution requirements for each member: Indicate the amount and type of each member’s initial contribution. This can include cash, property, services, or a promissory note.
- Procedures for adding and removing members: Define the process for onboarding new members or managing exits. Iowa law may require unanimous member approval for the addition of new members.
- What happens when a member sells their interest, becomes disabled, or dies: Detail buyout provisions, rights of first refusal, or insurance mechanisms.
- Conditions under which a member might become bankrupt or insolvent: Discuss potential dissociation or buyout options in such scenarios.
Management and Voting:
- Management structure and roles of members: Iowa allows both member-managed and manager-managed structures. Specify your choice and detail respective roles.
- Voting rights of each member: Often determined by ownership percentage, but can be customized.
- Rules for meetings and voting: State the frequency of member meetings, notice requirements, quorum, and voting procedures.
- Rules for managing potential conflicts of interest among members: Establish procedures to maintain transparency and fairness.
- Allocation of profits, losses, and distributions: Unless otherwise stated, this is typically based on ownership percentage.
- Provision for periodic financial audits or reviews: Detail if and when financial reviews or audits will take place to ensure transparency.
- Tax treatment of the LLC: Iowa LLCs are typically pass-through entities, but the members can elect for different taxation structures.
Changes and Amendments:
- Process for amending the operating agreement: This might require a supermajority or unanimous vote, depending on member preferences.
- Guidelines for company management during transition events: Describe management continuity in the face of significant changes.
- Conditions under which the LLC might be sold or merged: Define the decision-making process for these significant events.
Disputes, Legalities, and Policies:
- Clauses for dispute resolution or mediation: Incorporate mechanisms like arbitration or mediation to handle internal conflicts.
- Guidelines for non-compete and confidentiality agreements: Ensure they’re enforceable under Iowa law and are reasonable in scope.
- Provision for indemnification and limitation of liability: Detail the protection mechanisms for members or managers against potential lawsuits related to their roles.
Record Keeping and Communication:
- Details about record keeping requirements: Specify the necessary records in line with Iowa’s requirements, including financial documents, member contributions, etc.
- Guidelines for how company-related decisions will be documented or communicated: Can include requirements for meeting minutes or written resolutions.
Company Information and Dissolution:
- Description of the business’s purpose and activities: While not always mandatory, it’s useful for clarity.
- Identification of the registered agent and office: This is a requirement in Iowa. Clearly state the registered agent and their address.
- Procedures for dissolving the LLC: Outline the steps in compliance with Iowa dissolution procedures, including notifying the Iowa Secretary of State.
- Procedures for winding down or liquidating the company’s assets: Describe the process for settling debts and obligations, and distributing remaining assets.
How to Draft an Iowa 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 Iowa 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 certification 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 Iowa 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 Iowa, 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 Iowa?
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 Iowa LLC does not have an operating agreement?
Iowa default rules for LLCs will apply, but in cases of dispute, the law may be vague, and your members could end up in court.