Suppose you’re starting a business and forming a limited liability company (LLC) in Minnesota. 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.
Without an operating agreement, Minnesota 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 Minnesota Operating Agreement Include?
The Minnesota Operating Agreement sets the internal standards for an LLC in the state. Recognizing its primary components is pivotal for seamless governance and mitigating potential challenges.
- Each member’s rights and responsibilities: Detail roles, entitlements, and duties of each member. In Minnesota, unless the operating agreement states otherwise, all members have equal rights to participate in the management of the LLC.
- Capital contribution requirements for each member: Specify amounts, nature, and timings of initial and potential future contributions.
- Procedures for adding and removing members: By default, unanimous consent is required in Minnesota, but this can be adjusted in the operating agreement.
- What happens when a member sells their interest, becomes disabled, or dies: Define the processes for transfer of membership interest, any buyout procedures, and continuation clauses.
- Conditions under which a member might become bankrupt or insolvent: Detail the consequences and procedures in case a member faces bankruptcy or insolvency.
Management and Voting:
- Management structure and roles of members: Specify whether the LLC is member-managed or manager-managed. Both structures are permissible in Minnesota.
- Voting rights of each member: By default, voting in Minnesota is proportional to a member’s interest in the LLC, but can be adjusted in the agreement.
- Rules for meetings and voting: Include guidelines for meeting frequency, notice requirements, and quorum.
- Rules for managing potential conflicts of interest among members: Set clear guidelines to handle and disclose potential conflicts.
- Allocation of profits, losses, and distributions: While Minnesota defaults to allocation based on a member’s share in the LLC, the operating agreement can provide different methods.
- Provision for periodic financial audits or reviews: Determine if audits will occur, their frequency, and who will conduct them.
- Tax treatment of the LLC: Most LLCs in Minnesota are treated as pass-through entities for taxation. However, different tax classifications can be chosen.
Changes and Amendments:
- Process for amending the operating agreement: Clarify the procedures, such as voting thresholds, required to make changes to the agreement.
- Guidelines for company management during transition events: Detail strategies for significant changes, such as leadership transitions.
- Conditions under which the LLC might be sold or merged: Specify the process and requirements for major company decisions.
Disputes, Legalities, and Policies:
- Clauses for dispute resolution or mediation: It’s advisable to include a provision for arbitration or mediation to avoid costly court proceedings.
- Guidelines for non-compete and confidentiality agreements: Ensure that any non-compete clauses align with Minnesota laws, which tend to be protective of an individual’s right to work.
- Provision for indemnification and limitation of liability: Describe protections for members acting in good faith on the LLC’s behalf.
Record Keeping and Communication:
- Details about record keeping requirements: Highlight the need to keep thorough records as required by Minnesota law, including lists of members/managers, tax returns, and more.
- Guidelines for how company-related decisions will be documented or communicated: Specify formats, channels, and regularity.
Company Information and Dissolution:
- Description of the business’s purpose and activities: While not a strict requirement in Minnesota, stating the business purpose can be beneficial.
- Identification of the registered agent and office: This is a legal requirement in Minnesota; the registered agent must be available at the stated address during regular business hours.
- Procedures for dissolving the LLC: Ensure alignment with Minnesota dissolution procedures, which involve settling debts, notifying creditors, and more.
- Procedures for winding down or liquidating the company’s assets: Clearly define the steps to distribute assets upon dissolution.
How to Draft a Minnesota 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 Minnesota 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 Minnesota 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 Minnesota, but the wise entrepreneur would never do business without one. It’s a document that could be critical to your future. You may think a dispute will never arise, but times 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 Minnesota?
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 Minnesota LLC does not have an operating agreement?
Minnesota default rules for LLCs will apply, but in cases of dispute, the law may be vague, and your members could end up in court.