If you’re starting a business and forming a limited liability company (LLC) in Utah, 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, Utah 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 Utah Operating Agreement Include?
The Utah Operating Agreement crafts the internal guidelines for an LLC within the state. Understanding its core facets is crucial for smooth functioning and countering possible disputes.
- Each member’s rights and responsibilities: Detail roles, obligations, and entitlements for each member. In Utah, members have rights to participate in management unless otherwise stated in the operating agreement.
- Capital contribution requirements for each member: Clearly state both the type and amount of each member’s initial contributions, including any stipulated future contributions.
- Procedures for adding and removing members: Typically, unanimous consent is required in Utah to add a new member unless your agreement stipulates otherwise.
- What happens when a member sells their interest, becomes disabled, or dies: Outline transfer restrictions and buyout procedures. Utah does not automatically allow transfers of membership interest unless the operating agreement permits.
- Conditions under which a member might become bankrupt or insolvent: Define the handling of a member’s insolvency, including potential dissociation.
Management and Voting:
- Management structure and roles of members: Specify if the LLC will be member-managed or manager-managed. Utah allows for either structure.
- Voting rights of each member: Default voting in Utah is based on capital contributions, but you can customize this in your agreement.
- Rules for meetings and voting: Determine frequency, notice requirements, and quorum for meetings.
- Rules for managing potential conflicts of interest among members: Establish procedures for transparency and addressing any conflicts that arise.
- Allocation of profits, losses, and distributions: Utah defaults to allocations based on capital contributions, but this can be customized in the agreement.
- Provision for periodic financial audits or reviews: Detail if and how often audits will occur, specifying if they will be internal or external.
- Tax treatment of the LLC: By default, LLCs receive pass-through taxation. Specify if your Utah LLC elects different tax treatment.
Changes and Amendments:
- Process for amending the operating agreement: Indicate whether a majority, supermajority, or unanimous vote is necessary for changes.
- Guidelines for company management during transition events: Describe plans for significant shifts, like changes in leadership or business direction.
- Conditions under which the LLC might be sold or merged: Provide the procedural and voting requirements for such major decisions.
Disputes, Legalities, and Policies:
- Clauses for dispute resolution or mediation: Consider a provision that mandates Utah-based mediation or arbitration to keep proceedings local.
- Guidelines for non-compete and confidentiality agreements: Utah courts will enforce these if they’re reasonable in scope and duration.
- Provision for indemnification and limitation of liability: Detail protections for members or managers acting in good faith on behalf of the LLC.
Record Keeping and Communication:
- Details about record keeping requirements: Abide by Utah’s mandates, which include retaining lists of members and managers, capital contributions, tax returns, and other essential records.
- Guidelines for how company-related decisions will be documented or communicated: Specify the formats and channels for official communications.
Company Information and Dissolution:
- Description of the business’s purpose and activities: While not always mandatory in Utah, defining a business purpose can offer clarity.
- Identification of the registered agent and office: List your registered agent, who must have a physical address in Utah.
- Procedures for dissolving the LLC: Describe the steps aligned with Utah law, such as notifying creditors and settling liabilities.
- Procedures for winding down or liquidating the company’s assets: Provide an order of operations for distributing assets upon dissolution.
How to Draft a Utah 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 Utah laws.
This could cost anywhere from $500 to $2,500, but it could save you much more.
Certificate of Organization vs. Operating Agreement
The operating agreement should not be confused with your LLC’s certificate of organization. The certificate of organization officially forms your LLC with the state and includes no information about member roles or financial interests. Therefore, Utah recommends that you have all members create and sign an operating agreement before you file your certificate of organization to form your LLC.
Also, the certificate of organization 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 Utah 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 Utah, 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 Utah?
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 Utah LLC does not have an operating agreement?
Utah’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.