Suppose you’re starting a business and forming a limited liability company (LLC) in Maryland. 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.
Maryland laws will apply by default without an operating agreement, and disputes may have to be settled in court, which can have serious negative consequences for the business.
What Should the Maryland Operating Agreement Include?
The Maryland Operating Agreement delineates the internal operations of an LLC within the state. To maintain harmony and address potential issues, it’s vital to be acquainted with its essential components.
- Each member’s rights and responsibilities: Clearly specify roles, authority, and obligations of each member. Maryland allows members to customize these within the bounds of the law.
- Capital contribution requirements for each member: Document the amount or value each member contributes, which often informs their ownership percentage.
- Procedures for adding and removing members: Provide clear criteria and processes, especially since Maryland requires unanimous consent for adding members unless otherwise specified.
- What happens when a member sells their interest, becomes disabled, or dies: Address buyout or succession procedures to ensure business continuity.
- Conditions under which a member might become bankrupt or insolvent: Discuss ramifications and procedures should a member face financial hardships.
Management and Voting:
- Management structure and roles of members: Maryland LLCs can be member-managed or manager-managed. Designate which structure you’re adopting and outline the roles and responsibilities.
- Voting rights of each member: Usually proportionate to ownership, but can be adjusted as members see fit.
- Rules for meetings and voting: Describe frequency, quorum requirements, and decision-making procedures.
- Rules for managing potential conflicts of interest among members: Establish ethical guidelines and resolution procedures.
- Allocation of profits, losses, and distributions: Usually based on ownership percentages, but can be adjusted in the agreement.
- Provision for periodic financial audits or reviews: Determine frequency and depth of financial reviews.
- Tax treatment of the LLC: By default, LLCs have pass-through taxation, but members can opt for corporate taxation if preferred.
Changes and Amendments:
- Process for amending the operating agreement: Specify the procedures, ensuring you meet Maryland’s minimum requirements.
- Guidelines for company management during transition events: Define how the company navigates significant changes or challenges.
- Conditions under which the LLC might be sold or merged: Discuss circumstances and procedures for structural or ownership changes.
Disputes, Legalities, and Policies:
- Clauses for dispute resolution or mediation: Encourage resolution methods before resorting to litigation.
- Guidelines for non-compete and confidentiality agreements: Protect company interests and proprietary information.
- Provision for indemnification and limitation of liability: Define protections for members or managers acting on the LLC’s behalf, keeping Maryland law in mind.
Record Keeping and Communication:
- Details about record keeping requirements: Address Maryland’s specific requirements and any additional documentation the members find necessary.
- Guidelines for how company-related decisions will be documented or communicated: Consistency is key to prevent misunderstandings.
Company Information and Dissolution:
- Description of the business’s purpose and activities: Though not mandatory in Maryland, it’s beneficial to state the LLC’s objectives clearly.
- Identification of the registered agent and office: A Maryland requirement, specify who and where official communications should be directed.
- Procedures for dissolving the LLC: Align this with Maryland’s dissolution requirements.
- Procedures for winding down or liquidating the company’s assets: Guide members on steps to take should the LLC close its operations.
How to Draft a Maryland 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 Maryland 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 Maryland 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 Maryland, 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 operate agreement need to be notarized in Maryland?
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 Maryland LLC does not have an operating agreement?
Maryland default rules for LLCs will apply, but in cases of dispute, the law may be vague, and your members could end up in court.