Michigan Operating Agreement

Suppose you’re starting a business and forming a limited liability company (LLC) in Michigan. 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

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, Michigan 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 Michigan Operating Agreement Include?

The Michigan Operating Agreement provides a framework for the internal workings of an LLC established within the Great Lakes State. For effective organizational management and to preempt possible disputes, understanding its essential components is imperative.

Membership Information:

• Each member’s rights and responsibilities: Clearly state the roles, obligations, and expectations for each member within the LLC. This is crucial in Michigan, where clear definitions can prevent potential misunderstandings.
• Capital contribution requirements for each member: Detail the amount or value of contributions each member is providing, which can influence ownership percentages.
• Procedures for adding and removing members: Michigan allows flexibility in this process, so it’s vital to specify the procedures in the agreement.
• What happens when a member sells their interest, becomes disabled, or dies: Define buyout procedures, succession plans, or any insurance mechanisms.
• Conditions under which a member might become bankrupt or insolvent: Outline the measures that will be taken to protect the LLC in such scenarios.

Management and Voting:

• Management structure and roles of members: State whether the Michigan LLC is member-managed or manager-managed and define related duties.
• Voting rights of each member: Typically related to capital contribution, but can be customized as members see fit.
• Rules for meetings and voting: Specify frequency, notice requirements, and quorum for meetings, and how decisions are made.
• Rules for managing potential conflicts of interest among members: Outline policies to handle conflicts, ensuring business decisions prioritize the LLC.

Financial Matters:

• Allocation of profits, losses, and distributions: Typically based on capital contribution, but members can customize allocation.
• Provision for periodic financial audits or reviews: State if and when audits will take place, ensuring financial transparency.
• Tax treatment of the LLC: By default, LLCs are pass-through entities, but members can decide to be taxed differently if beneficial.

Changes and Amendments:

• Process for amending the operating agreement: Detail how changes can be made to the agreement, typically requiring a majority or unanimous vote.
• Guidelines for company management during transition events: Specify how management will navigate significant shifts or challenges.
• Conditions under which the LLC might be sold or merged: Provide clarity on potential major structural changes.

Disputes, Legalities, and Policies:

• Clauses for dispute resolution or mediation: Encourage non-litigious solutions to internal disagreements, which can save time and money.
• Guidelines for non-compete and confidentiality agreements: Protect the LLC’s interests and proprietary information.
• Provision for indemnification and limitation of liability: Offer protection for members from certain liabilities, in line with Michigan’s regulations.

Record Keeping and Communication:

• Details about record keeping requirements: While Michigan doesn’t have stringent rules, an operating agreement can cement best practices.
• Guidelines for how company-related decisions will be documented or communicated: Ensure all members remain informed.

Company Information and Dissolution:

• Description of the business’s purpose and activities: While not mandatory in Michigan, providing clarity helps guide business decisions.
• Identification of the registered agent and office: A requirement in Michigan, it’s essential to specify who and where legal documents are received.
• Procedures for dissolving the LLC: Align with Michigan’s dissolution procedures, which involve filing articles of dissolution.
• Procedures for winding down or liquidating the company’s assets: Provide guidance to ensure equitable asset distribution during dissolution.

How to Draft a Michigan 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 Michigan 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 Michigan 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 Michigan, 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.