If you’re starting a business and forming a limited liability company (LLC) in Vermont, 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, Vermont 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 Vermont Operating Agreement Include?
The Vermont Operating Agreement acts as a guide for the internal logistics of an LLC in the state. Being aware of its key elements ensures proficient governance and helps in addressing possible challenges.
- Each member’s rights and responsibilities: Clearly specify each member’s role, operational involvement, and obligations within the Vermont LLC.
- Capital contribution requirements for each member: Detail the amount, form, and timing of contributions, ensuring clarity on the consequences of any default.
- Procedures for adding and removing members: Outline the steps, including any required notices, voting thresholds, or buyout provisions, in accordance with Vermont regulations.
- What happens when a member sells their interest, becomes disabled, or dies: Define the rights of the remaining members to purchase the interest, the valuation method, and the handling of successors.
- Conditions under which a member might become bankrupt or insolvent: Establish the ramifications for the member and the LLC, including any potential buyout or dissolution clauses.
Management and Voting:
- Management structure and roles of members: Clearly state if the Vermont LLC is member-managed or manager-managed, defining the duties and powers of each role.
- Voting rights of each member: Typically proportional to capital contributions but can be customized. Ensure clarity on decision-making authority.
- Rules for meetings and voting: Define the frequency, notice period, quorum, and decision-making thresholds.
- Rules for managing potential conflicts of interest among members: Develop procedures to ensure transparency and fairness while adhering to Vermont’s ethical standards.
- Allocation of profits, losses, and distributions: Commonly in proportion to capital contributions, but can be customized. Define frequency and method.
- Provision for periodic financial audits or reviews: Decide on the frequency and the responsible party, considering transparency and member preferences.
- Tax treatment of the LLC: While Vermont LLCs generally have pass-through taxation, specify if any different tax structures have been elected.
Changes and Amendments:
- Process for amending the operating agreement: Clarify required notice periods and voting thresholds.
- Guidelines for company management during transition events: Establish plans for scenarios like member exits or management changes.
- Conditions under which the LLC might be sold or merged: Define the decision-making process for such significant actions.
Disputes, Legalities, and Policies:
- Clauses for dispute resolution or mediation: Consider opting for Vermont-specific mediation services and outline the preferred method.
- Guidelines for non-compete and confidentiality agreements: Ensure alignment with Vermont’s enforceability criteria and duration limits.
- Provision for indemnification and limitation of liability: Outline protections for members/managers consistent with Vermont law.
Record Keeping and Communication:
- Details about record keeping requirements: Adhere to Vermont’s mandates, specifying record types, storage methods, and member access rights.
- Guidelines for how company-related decisions will be documented or communicated: Promote clarity, consistency, and transparency in all LLC communications.
Company Information and Dissolution:
- Description of the business’s purpose and activities: Ensure clarity on the primary operations and objectives of the Vermont LLC.
- Identification of the registered agent and office: As required, provide up-to-date details of the Vermont registered agent and office.
- Procedures for dissolving the LLC: Detail the steps in line with Vermont’s regulations, ensuring clarity on asset distribution and liability settling.
- Procedures for winding down or liquidating the company’s assets: Specify the sequence of paying off liabilities and how the remaining assets will be distributed to members.
How to Draft a Vermont 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 Vermont 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.
Though you can include provisions in your articles of organization relating to the operating agreement, if the two conflict, the operating agreement controls affairs within the LLC, and the articles of organization’s provisions control affairs for people outside the LLC.
Keep Your Vermont 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 Vermont, 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 Vermont?
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 Vermont LLC does not have an operating agreement?
Vermont default rules for LLCs will apply, but in cases of dispute, the law may be vague, and your members could end up in court.