Washington LLC Operating Agreement
An operating agreement is a limited liability company’s governing document. It is written by the LLC’s members, who outline both the management and ownership of the company within the agreement. It is best to think of an operating agreement as a blueprint for the larger structure of your company.
State law does not legally require you to write an operating agreement, and the document is not filed with any government agency. An operating agreement is purely internal, and it may be altered at any time by your LLC members (although an operating agreement usually lays out a procedure for making amendments). With that said, it is unwise to forego writing an operating agreement.
A well-conceived operating agreement will help your company avoid potential conflicts and pitfalls as your business develops. This is especially true if your LLC has multiple members. For example, imagine that you are running your Washington LLC successfully, and after five years one of your members dies. An operating agreement would lay out specifically how that member’s LLC assets would be divided. Without an operating agreement, however, there is no agreed-upon path forward.
This is precisely the kind of development that so often leads to conflicts…and the courtroom.
What to Include in Your Washington LLC Operating Agreement
Every operating agreement is different, because every LLC has unique needs and concerns it must address. Your operating agreement will not read like the operating agreement of any other LLC.
However, there are broad categories which must be addressed for every company.
Ownership is laid out in the operating agreement. It is important that you list the full legal names and addresses of each member. If membership is ever under question in a court of law, it will not do your business any good to have membership listed merely as: Joe, from Seattle.
- Who are your company’s members?
- What is each member’s ownership percentage?
- What did each member contribute in exchange for their ownership percentage?
- What are the rights and duties of each member?
- How are profits and losses shared?
Rights and duties are critical. Who is authorized to enter into contracts for your company? Who is authorized to open bank accounts and lines of credit? Who is responsible for the company’s financial records, filing taxes, preparing for audits?
A Washington LLC is either managed by its members or by a manager (or managers). When you filed your Certificate of Formation, you were required to choose one or the other.
In your operating agreement, you should detail the specific duties of management. Every company has administrative roles: president, vice president, secretary, treasurer, etc. These do not necessarily need to be official positions, and various roles can be fulfilled by more than one member. What is important is assigning responsibility.
This is also a good place to lay out how management can change. How do you elect a new president? How can managers be removed? What happens in a situation where there is a conflict of interest?
Buying In and Selling Out
An operating agreement should address how new members can be admitted, and how old members can leave the company.
For example, if a member wishes to sell their ownership percentage, are they required to offer their percentage to the current members first? Is the sale dependent upon the approval of all the other members, or upon the approval of the company manager?
The particular procedures for buying-into and selling-out-of your LLC can be written however you like. Determining those procedures at the outset allows for all members to know exactly how the process works.
Amendments and Dissolution
A Washington LLC operating agreement can be changed by its members at any time. But the process for amendments should be detailed within the agreement itself.
- How can an amendment be proposed?
- Who is allowed to propose amendments?
- How many member votes are required to approve an amendment?
Dissolution should also be addressed in your operating agreement. Is dissolution set for a specific date? If not, are there specific events which would automatically cause you to dissolve your Washington LLC (such as the death of a member)? How many votes are necessary to approve dissolution?