If you’re starting a business and forming a limited liability company (LLC) in Washington, you’re not required to have a company agreement, but it’s a good idea to have one in your records.
A company agreement is essential 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 a Company Agreement
A smartly drafted company 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 company 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. A company 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 a company agreement, Washington 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 Washington Company Agreement Include?
The Washington Operating Agreement governs the internal operations of an LLC within the state. To guarantee smooth functionality and sidestep potential conflicts, understanding its essential components is imperative.
- Each member’s rights and responsibilities: Clearly outline the specific roles, duties, and obligations each member has within the Washington LLC. This may include operational roles, voting power, and more.
- Capital contribution requirements for each member: Specify both the amount and form (money, property, services) of initial contributions and potential future contributions from each member.
- Procedures for adding and removing members: Define the process in terms of any necessary votes, notice periods, and potential buyout or buy-in provisions, ensuring compliance with Washington state laws.
- What happens when a member sells their interest, becomes disabled, or dies: Establish any buyout or buy-in procedures, how valuation will be determined, and potential rights of heirs or estates.
- Conditions under which a member might become bankrupt or insolvent: Describe any effects on the member’s interest and the broader LLC, and whether other members or the LLC have rights to purchase the insolvent member’s interest.
Management and Voting:
- Management structure and roles of members: Determine if the Washington LLC will be member-managed or manager-managed, and clarify the powers and responsibilities tied to each role.
- Voting rights of each member: While often based on capital contributions, you can customize these rights. Define decision-making powers and if any decisions require a supermajority.
- Rules for meetings and voting: Detail requirements such as quorum, how often meetings are held, necessary notices, and voting thresholds for varied decisions.
- Rules for managing potential conflicts of interest among members: Establish a transparent process for disclosing and handling potential conflicts in alignment with Washington’s ethical guidelines.
- Allocation of profits, losses, and distributions: Typically, these are aligned with capital contributions, but can be tailored to different agreed-upon percentages.
- Provision for periodic financial audits or reviews: Define if and when audits or reviews will occur and who will be responsible for them.
- Tax treatment of the LLC: In Washington, LLCs often benefit from pass-through taxation, but members can opt for different tax classifications if preferred.
Changes and Amendments:
- Process for amending the operating agreement: Clearly stipulate the necessary votes and procedures to amend the agreement.
- Guidelines for company management during transition events: Address how management will function during significant changes, like the departure of a key member.
- Conditions under which the LLC might be sold or merged: Provide procedures and necessary approvals for large-scale entity changes.
Disputes, Legalities, and Policies:
- Clauses for dispute resolution or mediation: Consider using Washington-based mediation or arbitration before any legal actions.
- Guidelines for non-compete and confidentiality agreements: These should be crafted in line with Washington’s standards for enforceability.
- Provision for indemnification and limitation of liability: Offer protection for members/managers in compliance with Washington law.
Record Keeping and Communication:
- Details about record keeping requirements: Follow Washington’s statutory requirements for LLCs, ensuring members have access rights.
- Guidelines for how company-related decisions will be documented or communicated: Include both formal decision-making procedures and informal communication guidelines.
Company Information and Dissolution:
- Description of the business’s purpose and activities: Clearly state the business objectives and activities.
- Identification of the registered agent and office: Provide details of the registered agent and primary office location in Washington.
- Procedures for dissolving the LLC: Outline steps consistent with Washington’s LLC dissolution procedures, which include settling debts and distributing remaining assets.
- Procedures for winding down or liquidating the company’s assets: Define the sequence for addressing debts and how remaining assets will be distributed among members.
How to Draft a Washington Company Agreement
You can find company 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 company 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 Washington laws.
This could cost anywhere from $500 to $2,500, but it could save you much more.
Certificate of Formation vs. Company Agreement
The company agreement should not be confused with your LLC’s certificate of formation. The certificate of formation officially forms your LLC with the state and includes no information about member roles or financial interests.
Also, the certificate of formation is filed with the state and is part of the public record, while a company agreement is kept in your LLC’s records and referred to as needed.
Keep Your Washington Company Agreement Up to Date
It’s a good idea to periodically review your company agreement. Circumstances change, and the safest approach is to ensure your company agreement is entirely up to date. Generally, your company agreement will state that members have to vote to approve amendments to the company agreement.
Don’t Skip the Company Agreement
You’re not required to have a company agreement in Washington, 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 a company 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 company agreement need to be notarized in Washington?
No, company agreements do not have to be notarized. They are not filed with the state, just kept in your records.
What happens if a Washington LLC does not have a company agreement?
Washington’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.