Suppose you’re starting a business and forming a limited liability company (LLC) in Virginia. 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, Virginia 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 Virginia Operating Agreement Include?
The Virginia Operating Agreement establishes the rules for the internal management of an LLC in the state. Grasping its primary elements is critical for streamlined governance and tackling potential disagreements.
- Each member’s rights and responsibilities: Detail the specific roles, duties, and obligations each member has within the Virginia LLC. This may include operational roles, voting power, and more.
- Capital contribution requirements for each member: Specify the amount and form (cash, property, services, etc.) of initial and any future contributions expected from each member.
- Procedures for adding and removing members: Lay out the process, including any voting requirements, notice periods, and buyout provisions, in line with Virginia regulations.
- What happens when a member sells their interest, becomes disabled, or dies: Designate buy-sell provisions, valuation methodologies, and the potential rights of heirs or representatives.
- Conditions under which a member might become bankrupt or insolvent: Describe the impact on the member’s interest and the LLC as a whole, including any options for the LLC or other members to purchase the insolvent member’s interest.
Management and Voting:
- Management structure and roles of members: Define whether the Virginia LLC will be member-managed or manager-managed. Clearly distinguish the authority and responsibilities tied to each role.
- Voting rights of each member: Usually, this is proportional to capital contributions, but it can be customized. Be clear about decision-making powers and any supermajority requirements.
- Rules for meetings and voting: Detail the quorum, frequency, notice requirements, and the voting thresholds for various decisions.
- Rules for managing potential conflicts of interest among members: Develop a framework to handle and disclose potential conflicts, ensuring alignment with Virginia ethical standards.
- Allocation of profits, losses, and distributions: Typically aligned with capital contributions, this can be customized based on agreed percentages.
- Provision for periodic financial audits or reviews: Outline the frequency, depth, and responsible party for any financial reviews or audits.
- Tax treatment of the LLC: A Virginia LLC typically offers pass-through taxation, but members can opt for a different tax classification if preferred.
Changes and Amendments:
- Process for amending the operating agreement: Define the necessary quorum and voting thresholds to amend the agreement.
- Guidelines for company management during transition events: Clarify roles and responsibilities during key changes, like a member exit or a management shift.
- Conditions under which the LLC might be sold or merged: Lay out any procedures, required notices, and member voting requirements for significant entity changes.
Disputes, Legalities, and Policies:
- Clauses for dispute resolution or mediation: Emphasize the use of Virginia-based mediation or arbitration services prior to any court actions.
- Guidelines for non-compete and confidentiality agreements: Define terms in accordance with Virginia enforceability standards.
- Provision for indemnification and limitation of liability: Offer protections for members/managers consistent with Virginia law.
Record Keeping and Communication:
- Details about record keeping requirements: Align with Virginia’s statutory requirements for LLCs, ensuring members have access rights.
- Guidelines for how company-related decisions will be documented or communicated: Specify methods of communication and documentation, considering both formal and informal decisions.
Company Information and Dissolution:
- Description of the business’s purpose and activities: Clearly articulate the business objectives and operations.
- Identification of the registered agent and office: List the current registered agent and office location as required in Virginia.
- Procedures for dissolving the LLC: Describe steps in accordance with Virginia’s LLC dissolution procedures, including notifying creditors, settling liabilities, and distributing remaining assets.
- Procedures for winding down or liquidating the company’s assets: Define the sequence for addressing liabilities and how remaining assets should be distributed among members.
How to Draft a Virginia 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 Virginia 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 Virginia 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 Virginia, but the wise entrepreneur would never do business without one. It’s a document that could be critical to your future. You may think a dispute will never arise, but times 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 Virginia?
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 Virginia LLC does not have an operating agreement?
Virginia default rules for LLCs will apply, but in cases of dispute, the law may be vague, and your members could end up in court.