Suppose you’re starting a business and forming a limited liability company (LLC) in West 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, West 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 West Virginia Operating Agreement Include?
The West Virginia Operating Agreement frames the internal activities of an LLC in the state. Recognizing its main facets ensures smooth management and preempts potential disputes.
- Each member’s rights and responsibilities: Clearly state each member’s role within the West Virginia LLC, their obligations, operational functions, and decision-making authority.
- Capital contribution requirements for each member: Specify the amount and form (be it cash, property, or services) of each member’s contribution to the LLC, and any future capital calls that might be expected.
- Procedures for adding and removing members: Detail the process, including necessary approvals, notice periods, and potential buyout conditions. West Virginia may have specific regulations for these procedures.
- What happens when a member sells their interest, becomes disabled, or dies: Describe the steps, from valuation methods to potential rights of remaining members to buy out the interest.
- Conditions under which a member might become bankrupt or insolvent: Mention the implications for the LLC and the insolvent member’s interest.
Management and Voting:
- Management structure and roles of members: Choose between a member-managed or manager-managed West Virginia LLC, elaborating on responsibilities.
- Voting rights of each member: This can be proportionate to capital contributions or a different setup, depending on the agreement among members.
- Rules for meetings and voting: Clarify how often meetings occur, notification times, what constitutes a quorum, and the threshold for varied decisions.
- Rules for managing potential conflicts of interest among members: Create guidelines to handle any conflicts, keeping transparency and fairness in focus.
- Allocation of profits, losses, and distributions: While typically in line with capital contributions, it can be customized as per mutual agreement.
- Provision for periodic financial audits or reviews: Define the frequency and nature of financial reviews to maintain transparency.
- Tax treatment of the LLC: Generally, West Virginia LLCs get pass-through taxation, but consult with a tax professional about other potential classifications.
Changes and Amendments:
- Process for amending the operating agreement: Describe the needed approvals and method for changes to the agreement.
- Guidelines for company management during transition events: State the management’s role during significant events, such as adding/removing members.
- Conditions under which the LLC might be sold or merged: Specify any conditions and approvals necessary for larger scale changes to the LLC.
Disputes, Legalities, and Policies:
- Clauses for dispute resolution or mediation: It might be beneficial to have West Virginia-based arbitration or mediation as the primary mode of dispute resolution.
- Guidelines for non-compete and confidentiality agreements: Ensure enforceability by aligning them with West Virginia’s legal standards.
- Provision for indemnification and limitation of liability: Protect members or managers from certain liabilities, consistent with West Virginia statutes.
Record Keeping and Communication:
- Details about record keeping requirements: Adhere to West Virginia’s requirements for LLC documentation, making sure records are accessible to members.
- Guidelines for how company-related decisions will be documented or communicated: This can include meeting minutes, formal notifications, and other communications.
Company Information and Dissolution:
- Description of the business’s purpose and activities: Clearly outline the objectives and functions of the LLC.
- Identification of the registered agent and office: As required by West Virginia law, mention the designated registered agent and the primary business address.
- Procedures for dissolving the LLC: Ensure that this follows West Virginia’s LLC dissolution guidelines, including any state notifications and settling of liabilities.
- Procedures for winding down or liquidating the company’s assets: Detail the steps for asset distribution post any debt settlements.
How to Draft a West 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 West 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 West 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 West Virginia, 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 West 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 West Virginia LLC does not have an operating agreement?
West Virginia’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.