Suppose you’re starting a business and forming a limited liability company (LLC) in Mississippi. 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, Mississippi 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 Mississippi Operating Agreement Include?
The Mississippi Operating Agreement structures the internal affairs of an LLC in the state. Knowledge of its main elements is vital for seamless governance and averting potential disputes.
- Each member’s rights and responsibilities: Detail what is expected of each member in terms of both daily operations and overarching decisions for the LLC. Mississippi law allows flexibility in this, so you can customize roles to fit your business model.
- Capital contribution requirements for each member: Specify the amount and form (money, property, or services) of initial contributions from each member, and lay out expectations or conditions for future contributions.
- Procedures for adding and removing members: In Mississippi, unless the operating agreement states otherwise, all members must consent to add a new member. Detail the voting process and requirements for such changes.
- What happens when a member sells their interest, becomes disabled, or dies: Lay out processes like buyout provisions, rights of first refusal, or potential dissolution of the LLC in such scenarios.
- Conditions under which a member might become bankrupt or insolvent: Address how the LLC will manage situations where a member’s financial stability is compromised.
Management and Voting:
- Management structure and roles of members: Determine whether your Mississippi LLC will be member-managed or manager-managed, and clarify roles accordingly.
- Voting rights of each member: Define whether voting rights are proportional to capital contributions, equally distributed, or based on another metric.
- Rules for meetings and voting: Specify requirements like annual meetings, notice provisions, quorum needs, and special meeting protocols.
- Rules for managing potential conflicts of interest among members: Establish protocols to maintain transparency and fairness.
- Allocation of profits, losses, and distributions: In the absence of specific provisions, Mississippi law will distribute based on the proportion of contributions. Specify if you wish to diverge from this default.
- Provision for periodic financial audits or reviews: Detail any plans for internal or external financial audits.
- Tax treatment of the LLC: Most Mississippi LLCs default to pass-through taxation, but you can opt for corporate taxation. Define your preference.
Changes and Amendments:
- Process for amending the operating agreement: Typically, this might require a supermajority or unanimous vote. Define the threshold and procedure.
- Guidelines for company management during transition events: This could include leadership changes, significant asset sales, or other transformative business events.
- Conditions under which the LLC might be sold or merged: Lay out the process for these significant decisions, including member voting requirements.
Disputes, Legalities, and Policies:
- Clauses for dispute resolution or mediation: Consider specifying a Mississippi-based mediator or arbitrator for convenience.
- Guidelines for non-compete and confidentiality agreements: Given that the enforceability of non-compete clauses can vary, ensure they are reasonable in scope and duration for Mississippi.
- Provision for indemnification and limitation of liability: Specify scenarios in which the LLC will shield members or managers from personal liability.
Record Keeping and Communication:
- Details about record keeping requirements: Mississippi law mandates certain record-keeping, like member details and their contributions. Align with these requirements.
- Guidelines for how company-related decisions will be documented or communicated: This ensures clarity and transparency within the LLC.
Company Information and Dissolution:
- Description of the business’s purpose and activities: While broad language is often used here, specific purposes can be included to provide clear guidance.
- Identification of the registered agent and office: Every Mississippi LLC must have a registered agent in the state. Identify yours here.
- Procedures for dissolving the LLC: Define the steps for dissolution, making sure to align with Mississippi’s statutory requirements.
- Procedures for winding down or liquidating the company’s assets: Clarify how assets will be liquidated and debts paid off upon dissolution.
How to Draft a Mississippi 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 Mississippi 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 Mississippi 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 Mississippi, 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 Mississippi?
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 Mississippi LLC does not have an operating agreement?
Mississippi default rules for LLCs will apply, but in cases of dispute, the law may be vague, and your members could end up in court.