Suppose you’re starting a business and forming a limited liability company (LLC) in Oregon. 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, Oregon 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 Oregon Operating Agreement Include?
The Oregon Operating Agreement defines the internal mechanics of an LLC in the state. Grasping its core elements is pivotal for seamless operation and resolving potential disagreements.
- Each member’s rights and responsibilities: Clearly outline what is expected from each member in terms of duties, obligations, and conduct in relation to the Oregon LLC.
- Capital contribution requirements for each member: Document the monetary or non-monetary contributions each member will provide to start the LLC and possibly later on.
- Procedures for adding and removing members: In Oregon, any process outlined in your agreement will supersede the default state laws. Thus, it’s essential to establish a clear procedure.
- What happens when a member sells their interest, becomes disabled, or dies: Clarify any buy-sell agreements, rights of first refusal, or insurance policies in place.
- Conditions under which a member might become bankrupt or insolvent: Describe the implications on membership status and ownership percentage.
Management and Voting:
- Management structure and roles of members: Oregon allows LLCs to be either member-managed or manager-managed. Define which structure your LLC will use and detail associated roles.
- Voting rights of each member: Typically tied to ownership percentage, but can be customized differently if members agree.
- Rules for meetings and voting: Include details like frequency, quorum requirements, and any special notices needed for meetings.
- Rules for managing potential conflicts of interest among members: Define clear protocols for ensuring business decisions are made with the LLC’s best interest in mind.
- Allocation of profits, losses, and distributions: Often aligned with capital contribution, but it’s flexible and can be defined differently if needed.
- Provision for periodic financial audits or reviews: Establish the frequency and depth of financial reviews for transparency and accountability.
- Tax treatment of the LLC: By default, LLCs have pass-through taxation, but members can choose a different classification if beneficial.
Changes and Amendments:
- Process for amending the operating agreement: Usually, a majority or unanimous vote is needed, but define the specifics for your LLC.
- Guidelines for company management during transition events: Detail management protocols during major changes, ensuring smooth transitions.
- Conditions under which the LLC might be sold or merged: Provide clarity on potential sales, acquisitions, or mergers of the LLC.
Disputes, Legalities, and Policies:
- Clauses for dispute resolution or mediation: It’s often beneficial to have a specified mediation or arbitration process before resorting to litigation.
- Guidelines for non-compete and confidentiality agreements: Protect the LLC’s interests, intellectual property, and trade secrets.
- Provision for indemnification and limitation of liability: Shield members from certain legal actions or liabilities in line with Oregon’s regulations.
Record Keeping and Communication:
- Details about record keeping requirements: While Oregon has its guidelines, ensure your agreement provides a clear framework for maintaining LLC records.
- Guidelines for how company-related decisions will be documented or communicated: Set standards for transparency and clarity in communication.
Company Information and Dissolution:
- Description of the business’s purpose and activities: Although not strictly necessary, it helps to guide decision-making.
- Identification of the registered agent and office: Oregon requires every LLC to maintain a registered agent and office for service of process.
- Procedures for dissolving the LLC: Align with Oregon’s dissolution processes, ensuring all liabilities are settled and assets distributed appropriately.
- Procedures for winding down or liquidating the company’s assets: Provide a clear roadmap for liquidating assets fairly among members.
How to Draft an Oregon 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 member’s rights are protected. They can also include language that is specific to Oregon 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 Oregon 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.
In Oregon, members always legally have the power to amend or repeal the operating agreement, even if the LLC’s articles of organization or operating agreement assign those powers to managers.
Don’t Skip the Operating Agreement
You’re not required to have an operating agreement in Oregon, 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 Oregon?
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 Oregon LLC does not have an operating agreement?
Oregon default rules for LLCs will apply, but in cases of dispute, the law may be vague, and your members could end up in court.