If you’re starting a business and forming a limited liability company (LLC) in Kansas, 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 percentage,s and how proceeds are to 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, Kansas 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 Kansas Operating Agreement Include?
As entrepreneurs form an LLC in the heart of the Midwest, a comprehensive Kansas Operating Agreement becomes indispensable. This overview highlights the key inclusions tailored to align with Kansas’ business regulations and best practices.
- Each member’s rights and responsibilities: In Kansas, it’s essential that the operating agreement elucidates the roles, duties, and entitlements of each member, ensuring that the LLC functions smoothly.
- Capital contribution requirements for each member: Clearly define the amount or value of contributions each member is required to make. This can determine ownership percentages or profit-sharing ratios.
- Procedures for adding and removing members: Specify the process for bringing new members onboard and the circumstances under which members can be removed or can exit.
- What happens when a member sells their interest, becomes disabled, or dies: State the procedures for the transfer of interest and clarify how the LLC will continue operations under these conditions.
- Conditions under which a member might become bankrupt or insolvent: Define the implications for the member and the LLC should a member face financial hardships.
Management and Voting:
- Management structure and roles of members: Kansas LLCs can opt for a member-managed or manager-managed structure. Specify which structure is chosen and delineate responsibilities accordingly.
- Voting rights of each member: Outline the voting power of each member, often based on their ownership percentage or another agreed-upon metric.
- Rules for meetings and voting: Set standards for how often meetings will be held, the quorum requirements, and the decision-making processes.
- Rules for managing potential conflicts of interest among members: Institute transparency measures by having guidelines that manage and disclose potential conflicts of interest.
- Allocation of profits, losses, and distributions: Determine how the LLC’s financial results will be shared or distributed among members, either based on initial contributions or another formula.
- Provision for periodic financial audits or reviews: While not mandatory, it might be prudent to ensure transparency through periodic financial checks.
- Tax treatment of the LLC: By default, Kansas LLCs are pass-through entities, but if an alternate tax status is desired, this should be indicated in the agreement.
Changes and Amendments:
- Process for amending the operating agreement: Establish the procedures and any specific thresholds (like supermajorities) required to modify the agreement.
- Guidelines for company management during transition events: Ensure that there are procedures in place to guide the company through major transitions or pivotal events.
- Conditions under which the LLC might be sold or merged: Define the criteria and processes for significant business actions such as acquisitions, mergers, or sales.
Disputes, Legalities, and Policies:
- Clauses for dispute resolution or mediation: Consider adding clauses that advocate for mediation or arbitration before heading to litigation to resolve internal disputes.
- Guidelines for non-compete and confidentiality agreements: Set parameters for members’ engagements outside the LLC and the protection of sensitive company information.
- Provision for indemnification and limitation of liability: Detail the scope to which members are shielded from personal liability arising from their roles within the LLC.
Record Keeping and Communication:
- Details about record keeping requirements: While Kansas mandates certain record-keeping standards, the agreement can further specify any additional documentation or record-keeping the LLC deems necessary.
- Guidelines for how company-related decisions will be documented or communicated: Create a standardized system for noting and sharing crucial company decisions with members.
Company Information and Dissolution:
- Description of the business’s purpose and activities: Explicitly state the primary objectives and operations of the LLC to provide clarity to members and stakeholders.
- Identification of the resident agent and office: Every Kansas LLC needs a resident agent within the state. This individual or entity and their address should be documented in the agreement.
- Procedures for dissolving the LLC: Clearly outline the steps and criteria for dissolution, ensuring they are in line with Kansas’s regulations.
- Procedures for winding down or liquidating the company’s assets: Provide guidance on how assets will be liquidated and obligations settled should the LLC dissolve.
How to Draft a Kansas 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 Kansas 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 Kansas 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 Kansas, 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 Kansas?
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 Kansas LLC does not have an operating agreement?
Kansas default rules for LLCs will apply, but in cases of dispute, the law may be vague, and your members could end up in court.