If you’re starting a business and forming a limited liability company (LLC) in Rhode Island, 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, Rhode Island 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 Rhode Island Operating Agreement Include?
The Rhode Island Operating Agreement provides the framework for the internal organization of an LLC in the state. Knowing its key components is vital for sound management and circumventing potential conflicts.
- Each member’s rights and responsibilities: Clearly articulate roles, rights, and duties of each member, ensuring adherence to Rhode Island’s regulations. Members should be informed about their rights to access information and any fiduciary responsibilities they have.
- Capital contribution requirements for each member: Specify the amount and nature (cash, property, services) of the initial and any future expected contributions from each member.
- Procedures for adding and removing members: Define the necessary steps, notices, and conditions for admitting or excluding members, keeping in mind Rhode Island’s requirements.
- What happens when a member sells their interest, becomes disabled, or dies: Clarify how the member’s stake will be valued, any buyout procedures, and how the rights of heirs or successors will be handled.
- Conditions under which a member might become bankrupt or insolvent: Outline implications for the LLC and the member’s stake in such scenarios.
Management and Voting:
- Management structure and roles of members: Designate whether the LLC will be member-managed or manager-managed. For Rhode Island LLCs, be clear about management structures to avoid ambiguity.
- Voting rights of each member: Typically based on capital contributions, but can be otherwise defined. Establish voting procedures and ensure members are aware of them.
- Rules for meetings and voting: Provide clarity on how often meetings occur, the necessary notice, quorum requirements, and the manner of voting.
- Rules for managing potential conflicts of interest among members: Describe how conflicts will be identified, disclosed, and managed in alignment with state requirements.
- Allocation of profits, losses, and distributions: Generally, this is in proportion to capital contributions unless stated otherwise. Rhode Island LLCs have the flexibility to define this.
- Provision for periodic financial audits or reviews: Outline how often these will occur and who will conduct them.
- Tax treatment of the LLC: Rhode Island LLCs generally benefit from pass-through taxation, but this can be specified and changed depending on the LLC’s needs.
Changes and Amendments:
- Process for amending the operating agreement: Establish the procedure, including any required notices and member approval thresholds.
- Guidelines for company management during transition events: Address how the LLC will operate during significant changes or disruptions.
- Conditions under which the LLC might be sold or merged: Detail the requirements for major decisions like these and member involvement.
Disputes, Legalities, and Policies:
- Clauses for dispute resolution or mediation: Preferably, integrate Rhode Island-specific mediation or arbitration services.
- Guidelines for non-compete and confidentiality agreements: These must adhere to Rhode Island’s legal limits and standards.
- Provision for indemnification and limitation of liability: Define protection measures for members and managers, ensuring they’re in line with Rhode Island laws.
Record Keeping and Communication:
- Details about record keeping requirements: Rhode Island mandates certain record-keeping practices for LLCs. Specify how records will be maintained, stored, and accessed.
- Guidelines for how company-related decisions will be documented or communicated: Promote transparency and clear communication among members.
Company Information and Dissolution:
- Description of the business’s purpose and activities: This can align member goals and visions.
- Identification of the registered agent and office: Mandatory in Rhode Island; ensure accurate, up-to-date details of the agent and the office location.
- Procedures for dissolving the LLC: Describe how dissolution will be carried out in line with Rhode Island regulations.
- Procedures for winding down or liquidating the company’s assets: Offer clarity on how assets will be handled, liabilities settled, and any remaining assets distributed.
How to Draft a Rhode Island 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 Rhode Island 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 Rhode Island 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 Rhode Island, 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 Rhode Island?
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 Rhode Island LLC does not have an operating agreement?
Rhode Island’s default rules for LLCs will apply, but in cases of dispute, the law may be vague, and your members could end up in court.