Suppose you’re starting a business and forming a limited liability company (LLC) in Montana. 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, Montana 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 Montana Operating Agreement Include?
The Montana Operating Agreement serves as a guideline for the internal management of an LLC within the state. Awareness of its primary components ensures efficient operation and preparation for potential hurdles.
- Each member’s rights and responsibilities: Clearly lay out the specific duties and powers of each member. This can include responsibilities in day-to-day operations, decision-making, and other roles they might play in the LLC.
- Capital contribution requirements for each member: Detail the amount of money or value of property/services each member contributes initially and the expectations for future contributions.
- Procedures for adding and removing members: Montana law will generally defer to the operating agreement on this issue. Specify conditions and processes for how members can be added or removed, which might include member voting or other requirements.
- What happens when a member sells their interest, becomes disabled, or dies: This can include buyout provisions, right of first refusal, or even the potential dissolution of the LLC.
- Conditions under which a member might become bankrupt or insolvent: Address how the LLC will handle situations where a member files for bankruptcy or becomes insolvent.
Management and Voting:
- Management structure and roles of members: Determine whether the Montana LLC will be member-managed or manager-managed and clarify the specific roles.
- Voting rights of each member: Define if voting rights are proportional to capital contributions, per capita, or another basis.
- Rules for meetings and voting: Detail requirements for regular meetings, special meetings, notice provisions, and any quorum requirements.
- Rules for managing potential conflicts of interest among members: It’s good practice to have guidelines on how to handle potential conflicts, keeping members’ interests aligned with the LLC’s objectives.
- Allocation of profits, losses, and distributions: Typically, in Montana, this is proportional to a member’s capital contributions, unless the operating agreement states otherwise.
- Provision for periodic financial audits or reviews: Lay out if, when, and how financial audits are to be conducted.
- Tax treatment of the LLC: Most Montana LLCs use the default pass-through taxation, but it can opt for a different taxation structure if beneficial.
Changes and Amendments:
- Process for amending the operating agreement: Describe the procedure for making changes to the agreement and the voting threshold required.
- Guidelines for company management during transition events: This might include events like major acquisitions, mergers, or shifts in primary business activities.
- Conditions under which the LLC might be sold or merged: Clarify the conditions and processes, including member voting requirements.
Disputes, Legalities, and Policies:
- Clauses for dispute resolution or mediation: Consider using Montana-based mediators or arbitrators to keep proceedings local.
- Guidelines for non-compete and confidentiality agreements: Montana law will generally enforce reasonable non-compete agreements, so any terms should be carefully considered.
- Provision for indemnification and limitation of liability: Specify the conditions under which the LLC or other members might indemnify a member or manager.
Record Keeping and Communication:
- Details about record keeping requirements: Montana requires certain records to be kept, such as details of members and capital contributions. Ensure this aligns with state requirements.
- Guidelines for how company-related decisions will be documented or communicated: Promotes transparency and ensures all members are regularly informed of major decisions.
Company Information and Dissolution:
- Description of the business’s purpose and activities: While not always necessary, it’s beneficial to be clear about the primary purpose and activities of the LLC.
- Identification of the registered agent and office: Montana requires the LLC to maintain a registered agent within the state. Specify this information.
- Procedures for dissolving the LLC: Montana has certain guidelines for dissolution. Ensure that these guidelines align with Montana law, including requirements for notice, settling debts, and distributing remaining assets.
- Procedures for winding down or liquidating the company’s assets: Outline the steps and order of priority in which assets will be liquidated and liabilities addressed.
How to Draft a Montana 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 Montana 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 Montana 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 Montana, 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 Montana
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 Montana LLC does not have an operating agreement?
Montana default rules for LLCs will apply, but in cases of dispute, the law may be vague, and your members could end up in court.