If you’re starting a business and forming a limited liability company (LLC) in Maine, you must have an operating agreement. It is not filed with the state but needs to be kept 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
In addition to being a requirement under Maine law, 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, Maine laws will apply by default, and disputes may have to be settled in court, which can have serious negative consequences for the business. This is particularly true in Maine since the law expects LLCs to have an operating agreement and thus may lack rules to govern some situations that should have been addressed in the agreement.
What Should the Maine Operating Agreement Include?
Venturing into the business realm of the Pine Tree State? It’s essential to understand the critical components of a Maine Operating Agreement to ensure your LLC’s smooth operation.
- Each member’s rights and responsibilities: In a Maine LLC, it’s crucial to detail each member’s role, duties, and entitlements, providing a transparent framework that helps mitigate potential disputes.
- Capital contribution requirements for each member: Clearly specify the amount or value of capital each member contributes. This can be in cash, property, services, or a promissory note. Such contributions often determine each member’s ownership percentage.
- Procedures for adding and removing members: Establish processes aligned with Maine regulations for onboarding new members or allowing existing members to exit or be removed.
- What happens when a member sells their interest, becomes disabled, or dies: Define the process for these eventualities, which can include buyout clauses, insurance policies, or a right of first refusal for remaining members.
- Conditions under which a member might become bankrupt or insolvent: Address the consequences and procedures for a member’s bankruptcy, ensuring compliance with Maine’s laws.
Management and Voting:
- Management structure and roles of members: Decide whether the LLC will be member-managed or manager-managed. This decision often affects the level of member involvement in daily operations.
- Voting rights of each member: Typically based on ownership percentage, but can be altered based on negotiations. Ensure this aligns with Maine’s stipulations.
- Rules for meetings and voting: Lay out the procedures for both regular and special meetings, including how much notice is required, what constitutes a quorum, and voting requirements.
- Rules for managing potential conflicts of interest among members: Set guidelines to disclose and navigate conflicts to maintain trust and ethical business practices.
- Allocation of profits, losses, and distributions: Define the method by which profits and losses are shared among members, which is often proportional to capital contributions.
- Provision for periodic financial audits or reviews: While not always mandated, periodic audits can boost financial transparency and trust.
- Tax treatment of the LLC: By default, LLCs in Maine are treated as pass-through entities, but members can choose a different classification with the IRS.
Changes and Amendments:
- Process for amending the operating agreement: Specify the method and requirements (like supermajority votes) to make changes to the agreement.
- Guidelines for company management during transition events: Outline procedures to navigate significant company changes or structural adjustments.
- Conditions under which the LLC might be sold or merged: Describe the processes and requirements for major business decisions like sales or mergers.
Disputes, Legalities, and Policies:
- Clauses for dispute resolution or mediation: Highlight preferred methods, like arbitration or mediation, before considering litigation, to resolve disagreements.
- Guidelines for non-compete and confidentiality agreements: Define boundaries regarding competition and the handling of sensitive company information.
- Provision for indemnification and limitation of liability: Detail protections for members against certain legal actions, ensuring alignment with Maine laws.
Record Keeping and Communication:
- Details about record keeping requirements: Maine has certain statutory requirements for LLC record-keeping. Ensure the operating agreement aligns with these while possibly adding more stringent requirements.
- Guidelines for how company-related decisions will be documented or communicated: Establish consistent communication methods for company decisions, ensuring transparency and clarity.
Company Information and Dissolution:
- Description of the business’s purpose and activities: Clearly state the company’s objectives and operations to ensure alignment among members.
- Identification of the registered agent and office: Every Maine LLC requires a registered agent within the state. Document this information in the operating agreement.
- Procedures for dissolving the LLC: Outline steps for dissolution in compliance with Maine statutes, ensuring all obligations are met.
- Procedures for winding down or liquidating the company’s assets: Address the distribution of assets and handling of liabilities upon the LLC’s dissolution.
It’s important to note that the operating agreement may not alter Maine’s default LLC laws.
How to Draft a Maine 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 Maine laws. This is particularly important since, as mentioned above, the operating agreement may not alter certain provisions specific to Maine laws.
This could cost anywhere from $500 to $2,500, but it could save you much more.
Certificate of Formation vs. Operating Agreement
The operating agreement should not be confused with your LLC’s certificate of formation. The certificate of formation officially forms your LLC with the state and includes no information about member roles or financial interests.
Also, the certificate of formation 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 Maine 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 fully 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 required to have an operating agreement in Maine, but the wise entrepreneur would never do business without one anyway. 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 Maine?
No, operating agreements do not have to be notarized. They are required but are not filed with the state; they are just kept in your records.
What happens if a Maine LLC does not have an operating agreement?
Maine default rules for LLCs will apply, but in cases of dispute, the law may be vague, and your members could end up in court. This is particularly true in Maine since an operating agreement is required.