Suppose you’re starting a business and forming a limited liability company (LLC) in Massachusetts. In that case, you’re not required to have an operating agreement, but it’s a good idea to have one in your records.
You are, however, required to keep records of items generally spelled out in the operating agreement at your principal business address. Therefore, those records are subject to inspection by request.
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, Massachusetts 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 Massachusetts Operating Agreement Include?
The Massachusetts Operating Agreement demarcates the internal proceedings of an LLC in the state. Familiarity with its chief elements ensures proficient management and minimizes potential issues.
- Each member’s rights and responsibilities: Clearly outline each member’s roles, entitlements, and obligations. Members have equal rights to participate in the management of the LLC in Massachusetts unless the operating agreement states otherwise.
- Capital contribution requirements for each member: Specify the amount and type of initial contributions, and any future contributions required.
- Procedures for adding and removing members: By default, unanimous consent is needed to add new members in Massachusetts. However, you can stipulate a different process in the operating agreement.
- What happens when a member sells their interest, becomes disabled, or dies: Define the transfer restrictions, buyout procedures, and any right of first refusal clauses.
- Conditions under which a member might become bankrupt or insolvent: Outline the repercussions and steps if a member faces financial difficulties, such as dissociation.
Management and Voting:
- Management structure and roles of members: Indicate whether the LLC is member-managed or manager-managed. Massachusetts permits both structures.
- Voting rights of each member: By default, voting rights are proportionate to a member’s interest in the LLC, but you can alter this in the agreement.
- Rules for meetings and voting: Detail frequency, notice requirements, and quorum rules.
- Rules for managing potential conflicts of interest among members: Establish transparency procedures and protocols to address potential conflicts.
- Allocation of profits, losses, and distributions: Although Massachusetts defaults to allocation based on a member’s interest in the LLC, you can define a different distribution structure in the agreement.
- Provision for periodic financial audits or reviews: State if and how often the LLC will undergo financial audits, and by whom.
- Tax treatment of the LLC: By default, LLCs are treated as pass-through entities for tax purposes. However, you can elect to have your Massachusetts LLC taxed differently.
Changes and Amendments:
- Process for amending the operating agreement: Typically, major decisions, including amendments, require unanimous consent. Still, you can specify a different threshold in the agreement.
- Guidelines for company management during transition events: Outline procedures for significant changes, such as leadership shifts.
- Conditions under which the LLC might be sold or merged: Define voting requirements and processes for major events like mergers.
Disputes, Legalities, and Policies:
- Clauses for dispute resolution or mediation: It might be beneficial to include a provision for arbitration or mediation within Massachusetts to avoid court proceedings.
- Guidelines for non-compete and confidentiality agreements: Massachusetts has specific rules regarding the enforceability of non-competes, so ensure any clauses are compliant with state law.
- Provision for indemnification and limitation of liability: Describe protections for members or managers acting in good faith on the LLC’s behalf.
Record Keeping and Communication:
- Details about record keeping requirements: Align with Massachusetts requirements, which typically include retaining lists of members and managers, tax returns, and more.
- Guidelines for how company-related decisions will be documented or communicated: Specify communication channels and formats for official LLC decisions.
Company Information and Dissolution:
- Description of the business’s purpose and activities: While not mandatory in Massachusetts, clarifying the business purpose can be helpful.
- Identification of the resident agent and office: Your resident agent must be authorized to do business in Massachusetts.
- Procedures for dissolving the LLC: Follow Massachusetts dissolution procedures, which include notifying creditors, settling debts, and filing appropriate paperwork.
- Procedures for winding down or liquidating the company’s assets: Define a sequence for asset distribution upon dissolution.
In the absence of an operating agreement, you’re required to keep records of the following:
- the amount of cash and a description and statement of the agreed value of the other property or services contributed by each member and to which each member has agreed to contribute;
- the times at which or events on the happening of which any additional contributions agreed to be made by each member are to be made;
- any right of a member to receive, or of a manager to make, distributions to a member; and
- any events upon the happening of which the limited liability company is to be dissolved and its affairs wound up.
How to Draft a Massachusetts 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 Massachusetts 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 certificate 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 Massachusetts 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 Massachusetts, 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 Massachusetts?
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 Massachusetts LLC does not have an operating agreement?
Massachusetts default rules for LLCs will apply, but in cases of dispute, the law may be vague, and your members could end up in court.