Suppose you’re starting a business and forming a limited liability company (LLC) in Wisconsin. 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, Wisconsin 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 Wisconsin Operating Agreement Include?
The Wisconsin Operating Agreement lays out the internal strategies of an LLC in the state. Ensuring efficient governance and preparation for potential challenges relies on understanding its crucial components.
- Each member’s rights and responsibilities: Clearly detail the roles, rights, and duties of each member. In Wisconsin, members have the autonomy to define these roles but should do so explicitly to avoid misunderstandings.
- Capital contribution requirements for each member: Describe the initial and potential future contributions (money, property, services) expected from each member.
- Procedures for adding and removing members: Define the process, any required notices, and conditions for admitting or removing members.
- What happens when a member sells their interest, becomes disabled, or dies: Include provisions addressing buyouts, valuation methods, and the rights of heirs or successors.
- Conditions under which a member might become bankrupt or insolvent: Address the effects on the member’s LLC interest and the LLC’s operations if such an event occurs.
Management and Voting:
- Management structure and roles of members: State whether the LLC will be member-managed or manager-managed. Define roles, powers, and duties accordingly.
- Voting rights of each member: Default may be proportional to contributions, but you can establish other voting rights.
- Rules for meetings and voting: Detail notice requirements, frequency, and quorum for meetings, and processes for making decisions.
- Rules for managing potential conflicts of interest among members: Establish transparent guidelines for managing and disclosing conflicts.
- Allocation of profits, losses, and distributions: Typically proportional to member contributions, but you can set different methods.
- Provision for periodic financial audits or reviews: Specify intervals and methods for financial transparency.
- Tax treatment of the LLC: Usually, LLCs have pass-through taxation, but other options might be preferable depending on your needs.
Changes and Amendments:
- Process for amending the operating agreement: Lay out the procedure, any necessary notices, and member approval thresholds.
- Guidelines for company management during transition events: Define continuity plans for unforeseen disruptions or member changes.
- Conditions under which the LLC might be sold or merged: Establish guidelines and member approval requirements for these major decisions.
Disputes, Legalities, and Policies:
- Clauses for dispute resolution or mediation: Preferably, identify local or Wisconsin-based mediation or arbitration services.
- Guidelines for non-compete and confidentiality agreements: Set enforceable boundaries that adhere to Wisconsin’s standards and laws.
- Provision for indemnification and limitation of liability: Protect members and managers from liabilities arising from their roles, within the bounds of Wisconsin law.
Record Keeping and Communication:
- Details about record keeping requirements: Adhere to Wisconsin’s requirements and provide clear guidelines for maintaining and accessing records.
- Guidelines for how company-related decisions will be documented or communicated: Ensure consistent communication and documentation protocols.
Company Information and Dissolution:
- Description of the business’s purpose and activities: While optional, this can be useful for aligning member goals.
- Identification of the registered agent and office: Mandatory in Wisconsin, ensure accurate and updated information of the agent and office address.
- Procedures for dissolving the LLC: Outline the dissolution process according to Wisconsin law and member approval.
- Procedures for winding down or liquidating the company’s assets: Provide steps for disposing of assets, settling liabilities, and distributing any remaining assets to members.
How to Draft a Wisconsin 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 Wisconsin laws.
This could cost anywhere from $500 to $2,500, but it could save you much more.
In Wisconsin, even if you file a document with the state that contradicts it, your operating agreement is the end-all authority for your LLC’s internal management. So be sure to take care when drafting your operating agreement!
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. In Wisconsin, you aren’t allowed to file any additional provisions alongside your articles of organization.
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 Wisconsin 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 Wisconsin, 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 Wisconsin?
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 Wisconsin LLC does not have an operating agreement?
Wisconsin’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.