Suppose you’re starting a business and forming a limited liability company (LLC) in Ohio. 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, Ohio 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 Ohio Operating Agreement Include?
The Ohio Operating Agreement outlines the rules and procedures for an LLC’s internal management within the state. Understanding its main facets is essential for proficient operation and circumventing possible conflicts.
- Each member’s rights and responsibilities: Outline clearly the roles, expectations, and duties of each member. This can be crafted to reflect equal say or any other custom structure.
- Capital contribution requirements for each member: Clearly state the amount and type of contribution (monetary, property, services, etc.) that each member is responsible for.
- Procedures for adding and removing members: In Ohio, you can set out custom rules for this, whether it’s unanimous consent, majority vote, or another procedure.
- What happens when a member sells their interest, becomes disabled, or dies: Define procedures for buyouts, succession, or dissolution in these scenarios.
- Conditions under which a member might become bankrupt or insolvent: Indicate the steps to follow or consequences that might ensue should a member face financial challenges.
Management and Voting:
- Management structure and roles of members: Ohio LLCs can choose to be member-managed or manager-managed. Clearly define roles and expectations based on your choice.
- Voting rights of each member: Specify whether voting rights are proportional to ownership stakes or if another structure is adopted.
- Rules for meetings and voting: Establish protocols for regular meetings, special meetings, notice requirements, and quorum.
- Rules for managing potential conflicts of interest among members: Implement guidelines to address and resolve conflicts transparently.
- Allocation of profits, losses, and distributions: Unless otherwise agreed, Ohio defaults to distributions based on ownership percentages. Specify if your LLC has a different approach.
- Provision for periodic financial audits or reviews: Set the frequency and nature of financial reviews, ensuring transparency and accountability.
- Tax treatment of the LLC: Ohio LLCs default to pass-through taxation, but you can specify if the LLC seeks to be taxed as a corporation.
Changes and Amendments:
- Process for amending the operating agreement: Detail the necessary votes or procedures to amend the agreement.
- Guidelines for company management during transition events: Offer guidance on management strategies during significant changes or challenges.
- Conditions under which the LLC might be sold or merged: Define the processes and requirements for significant business decisions.
Disputes, Legalities, and Policies:
- Clauses for dispute resolution or mediation: Consider stipulating alternative dispute resolution methods to streamline potential disputes.
- Guidelines for non-compete and confidentiality agreements: Ensure these align with Ohio’s legal standards for enforceability.
- Provision for indemnification and limitation of liability: Define scenarios where members or managers might be protected from personal liability.
Record Keeping and Communication:
- Details about record keeping requirements: Ohio mandates certain records be maintained; ensure your agreement reflects this and any additional record-keeping specifics.
- Guidelines for how company-related decisions will be documented or communicated: Specify the communication mediums and formats preferred.
Company Information and Dissolution:
- Description of the business’s purpose and activities: Clearly state the LLC’s primary objectives and operations.
- Identification of the statutory agent and office: As mandated by Ohio law, provide the name and address of your statutory agent.
- Procedures for dissolving the LLC: Define steps in accordance with Ohio’s dissolution statutes.
- Procedures for winding down or liquidating the company’s assets: Describe how assets will be managed, debts settled, and any remaining funds distributed to members.
How to Draft an Ohio 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.
If your business has multiple members, you should consider having an attorney draw up your operating agreement. An attorney will ensure that all bases are covered, and all member’s rights are protected. They can also include language that is specific to Ohio laws.
This could cost anywhere from $500 to $2,500, but it could save you much more than that.
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 Ohio 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 Ohio, 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 operate agreement need to be notarized in Ohio?
No, operating agreements do not have to be notarized. They are not filed with the state, just kept in your records.
What happens if an Ohio LLC does not have an operating agreement?
Ohio default rules for LLCs will apply, but in cases of dispute, the law may be vague, and your members could end up in court.