It might look like you are good to go once you have registered your business, managed your paperwork and startup costs, got your permits, and even registered for taxes. After all, what more could you need? However, starting an LLC in Michigan takes more than having the physical and technical parts ready. You also must prepare yourself for the future. As a business grows and attracts more partners and clients, issues are likely to arise. They are especially common where you and other members of the business do not have clear guidelines on how you will handle the operations. We will cover a very important document (an operating agreement for an LLC) that all businesses must have, why it is essential, and what you have to must include in your Michigan operating agreement.
What is a Michigan LLC Operating Agreement?
In any business setup, there is someone responsible for calling the shots. It becomes necessary to delegate the decision-making when a business has many moving parts. For example, one person may run the finance section, another may handle management as a whole, and another may be dealing with marketing. This setting of LLC member responsibilities when forming an LLC in Michigan ensures that people do not disagree on who is accountable for what.
You may have noticed that LLCs are very flexible, and the authorities do not necessarily dictate how you should handle your business. Instead, Section 450.4102 of the statutes dictates that you may prepare an operating agreement on your own. In it, you set out the rights of each party to the organization and the overall business structure. You also need to be clear on the official procedures that will be pertinent to the organization e.g., who deals with legal matters, who handles procurement etc. By doing this, you can avoid wrangles in the future regarding someone not having done their part.
Please note that also having these guidelines also goes a long way in affording you legal protection. If you are all clear on what each one of you should do, you can avoid suffering blame when someone does not do their part. Instead, you can refer to the agreement, find the accountable person, and hold them up to the task.
Am I Required to Have an Operating Agreement in Michigan?
As part of your registration procedures, nobody will ask you to present an agreement. The same goes for when you set up shop and start running your operations. The law does not require you or anyone in your LLC business in Michigan to have such guidelines in place. Thus, as far as regulations go, you will be safe to go about your business with or without this paperwork.
However, having clear LLC procedures when creating an operating agreement always works in your favor. For one, you can govern each other’s conduct and avoid getting into wrangles over avoidable situations. Secondly, it cements personal liability protection to prevent you from being personally liable. Having this agreement enforces the corporate veil which LLCs enjoy by default. When someone comes after you, it is easy to use the agreement as proof that the actions of the business were in line with what you have agreed on as owners. Most importantly, it maintains cordial working relationships among the members. Whenever an issue arises, you can refer to the document and find the best way to deal with it.
What are the Benefits of Creating an Operating Agreement?
A business is only successful if most efforts are geared towards helping it succeed. Look at it this way. If LLC owners are clear about their role in the organization, they will spend less time questioning what they should be doing. Instead, they will focus on their role, helping the business do well.
Here are some reasons why getting an agreement in place will work for the good of your organization:
- Everyone will be clear on what their role is, and this reduces back and forth during task sharing. It increases efficiency in the organization and helps a business scale faster.
- All members understand how much of the company they own and how much they can get during profit division.
- Dealing with new members, resignations, resident agent changes, and even termination of the organization becomes much more manageable. Instead of arguing over what the best course of action is, the document will have the procedures for member additions and resignations. All members will have to do is follow through with what they agreed to in the first place.
- When legal matters arise, the members can avoid having to be subject to Michigan’s default rules. Instead, they can decide how they want to handle the situation. Courts will generally afford such an organized company more respect and allow you to deal with the situation how you see best.
How to draft a Michigan LLC Operating Agreement?
When creating this important legal document, you must be clear about:
- The name, address, formation date, and contact of the organization.
- Who is a member of the organization? List the members, their contributions, and how much they own.
- Who represents the organization? Typically, this is the person or company in charge of receiving your correspondence from the authorities.
- How long do you plan to be in business? If you have a specific timeframe, you should include this.
- How will you terminate the business? Even if you do not plan on discontinuing your company operations, it can happen. You should outline the LLC dissolution processes you will use when sharing out assets.
- How much does each member get from the business? Consider this the profit and loss sharing plan which can have contributions as its basis, or another means agreed upon by the members.
- What will the business do and how will you divide the roles? You should also specify if members will receive compensation for their roles.
- Will the business add new members? Show how you will handle new entrants and how you will deal with members who want to leave the organization. This section should also show how you will handle deaths.
- Can members change the agreement? If yes, show how this will take place, and how many people will need to agree to the changes.
- Will everyone have the right to vote? Some companies operating in Michigan decide this based on contributions while others use an equal right voting approach.
As members, you will have to sit down, assess what works for you, and choose the best drafting option. You can decide to use:
With many free templates online, you can create an operating agreement on your own. This method works for people on a budget who are starting a business devoid of complexities.
Hiring an Attorney
If you are dealing with a complex situation, using DIY might not be the best option and you may need to hire a lawyer. Michigan lawyers that specialize in LLCs are your best bet in this case. They have the skills to ensure you do not end up shooting yourself in the foot. While they are costly, they are necessary in some business situations.
Hiring an LLC Formation Service
If you would rather avoid making costly mistakes but do not want to fork out hundreds of dollars, you can also use online services. They feature in-house experts who specialize in drafting legal documents. Plus, most of these services throw in free agreement drafting if you register your business with them. Good LLC formation process service examples include ZenBusiness and Northwest Registered Agent.
Where is an Operating Agreement filed?
No authorities will ask you to present this document. However, if you have a court case, you may need to present it as evidence. Some banks also ask for a copy when you open a bank account to verify the signatories. The best place to keep this document is with the company records. Ensure that all LLC members also have a copy, and each time you amend the document, make sure everyone gets a copy.
Making Changes to Your Operating Agreement
Changing your agreement is inevitable as the business grows. For example, you may change the manager when doing business in Michigan. You will want to change this in the current document and ensure everyone gets a copy. However, to update a Michigan operating agreement, you must adhere to the terms stipulated in the agreement. Say, for example, all members have to vote on it. You should ensure that you get this total vote before proceeding with the amendments.