Why an Operating Agreement for Your Massachusetts LLC?
Your business needs an operating agreement if organized as an LLC, or limited liability company in Massachusetts. The reason an operating agreement is so important for your LLC is that it is the document which details the operational aspects of your business. If you fail to have an operating agreement you may personally be subject to liability if your business appears to operate as a sole proprietorship or partnership. As the Massachusetts business owner or managing executive, you do not want to be in the position of assuming personal liability simply for lack of an operating agreement. Our firm can help you by drafting an operating agreement for your LLC.
What is the Purpose of an Operating Agreement in a Massachusetts LLC?
Preliminary LLC Operating Agreement Provisions
A Massachusetts business formed as an LLC should indicate the following in its operating agreement:
- the effective date of the agreement
- the fact that the business was formed as an LLC
- the name of the LLC (being different from any other named corporation in Massachusetts)
- a named registered agent for receipt of service of process
- the business purpose of the Massachusetts LLC
- how long the LLC will remain in business (sometimes companies choose to limit the duration of the LLC)
LLC Membership in the Operating Agreement
The membership section of the LLC operating agreement states the rights of members of the LLC. This section of the operating agreement also outlines the type of LLC formed in Massachusetts: either a member-managed LLC or a manager-managed LLC. The operating agreement should contain the following terms:
- a statement regarding LLC member liability – ideally, that the LLC member is not liable for claims, debts, and other obligations levied against the LLC
- how the member’s may be reimbursed for start-up expenses associated with the formation of the LLC
- who will manage the LLC
- ownership percentages of each member of the Massachusetts LLC
- voting rights of members of the LLC
- compensation of the members of the LLC
- frequency of meetings of the LLC members
Capital Provisions of the LLC
- The operating agreement should indicate the capital contributions each member has or will make to the company, as well as percentage of ownership interest of each member of the Massachusetts LLC
- the operating agreement should address if, when and how LLC members may vote to require additional capital contributions to the company as well as what will happen should a member of the LLC fail to make a required contribution
- the LLC operating agreement should also detail how profits and losses will be handled
Membership Withdrawal or Transfer from the LLC
- provisions in the operating agreement should indicate what notice a member must give to withdraw from the LLC, and any restrictions on the transfer of membership in the LLC
- the operating agreement should further provide for dissolution of the company, i.e., what happens in the event of the death, retirement or resignation of a member and how the LLC can be dissolved by the members of the LLC
General Operating Agreement Provisions
In addition to the specific sections mentioned in this article, the Massachusetts LLC operating agreement should contain a section addressing multiple general provisions, including, but not limited to the following:
- the designation of officers by the LLC members as necessary
- how records of the LLC will be kept (membership list, names and addresses of members, etc.)
- an indemnification clause
- the use of mediation or arbitration to settle disputes among LLC members
- a clause indicating that the operating agreement of the LLC constitutes the entire agreement, i.e., that no other agreement existw that might alter the meaning of the present operating agreement
- a severability clause
“I Understand Why an Operating Agreement is Important, but Can’t This Agreement Be Found Online for Free?”
Yes. Free operating agreement templates are available from numerous online sources, and many of these agreements purport to be individualized to the statutes of a specific state. While these pre-fab operating agreements are available for free online, what these agreements lack is language in the drafting of the operating agreement that is specific to your business and your industry. Unless you, as the owner or executive manager, are familiar with the law relative to LLC formation in Massachusetts and to common law and other sources of law relevant to contracts, you would be ill-advised to attempt to draft an operating agreement on your own. A competent attorney with knowledge of contract and business law is a critical partner for any business owner or managing executive in drafting of an operating agreement.
More Resources for Massachusetts business owners:
The website mass.gov has many resources for business owners contemplating starting or operating an LLC. From the laws that effect LLC’s, to regulations about LLC’s, to court rulings on using an LLC in certain professions, and how to form an LLC. Visit the website here to read more information on this subject.
DISCLAIMER:
The information provided in the pages and posts of this website are for general informational purposes only. The information presented on this site is not legal advice, and no attorney-client relationship is formed by the use of this site.
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