How to start an LLC can involve filing articles of organization with the state and establishing internal ground rules for how your business should operate. Establishing your credibility as a legal entity is a part of the plan.
Every Virginia LLC is encouraged, but not required, to have an operating agreement to safeguard the company’s operations, from organization to dissolution. It ensures that all LLC members understand their roles and responsibilities. This page guides you in making an operating agreement.
On this page, you’ll learn about the following:
Virginia LLC Operating Agreement Content
An operating agreement is a legal document detailing the LLC’s organizational structure and operational procedures. Topics not restricted to a single member or multi-member LLC will be covered. While these provisions might not influence day-to-day operations, they must be included for legal reasons.
- Ownership: The operating agreement details who the members are and how ownership is divided, be it a sole proprietorship or LLC. Sole proprietorship refers to a single person with total control over a business, also known as a single-member LLC. Multi-member LLC members can have either equal or varying ownership interests.
- Management: Your LLC could be member-managed or manager-managed. The former means members can decide regarding contracts with third parties; the latter means only designated managers can do so. Using “manager-managed” instead of “hands-on” can reduce administrative work. Management’s authority is also limited in the Operating Agreement.
- Voting: Define each owner’s voting rights and voting thresholds, such as a majority vote, supermajority vote, and unanimous consent. A variety of approvals are needed for each type of decision.
- Changes in Membership Structure: If someone leaves the company, how will roles and ownership be transferred? A member buyout and/or replacement procedure must be outlined in the LLC’s governing document.
- Contributions: All types of contributions are accepted. In order to fund their ownership interests, members will have to invest in the collective funds.
- Equity Splits: Determine equity for each member, taking into consideration things like their contributions, responsibilities, and fairness. Maintaining fairness in your equity split will help prevent future disagreements.
- Transfers: You may want to consider outlawing transfers of ownership interests without the consent of all owners. It’s always a good idea to include permitted transfers, such as first refusal, drag-along rights, tag-along rights, and estate planning transfers.
- Business Restrictions: To protect the privacy of the company, including confidentiality obligations. You may also ban the owners from owning competing businesses.
- Intellectual Property: Detail; the ownership of intellectual property created by members. Make sure all company-created intellectual property is owned by the company. You can find alternative ownership/license structures if necessary.
- Taxation: Determine how you will be taxed and plan accordingly. Remember, however, that you must file an LLC annual report and might be required a sales tax.
- Guaranteed Payments: Determine if any of the members should receive Guaranteed Payments, which are like a salary, particularly if your LLC is taxed as a partnership.
- Distribution & Dividends: Explain to all members how the funds will be allocated. A pass-through entity will impose tax distributions regardless of profit distributions.
- Dissolution: The LLC should be dissolved if all members elect to cease operations. It is important to identify how you will end your business in your operating agreement.
Note that the operating agreement, though not a legal requirement in most states, is vital in the operation of your LLC. Should your members have issues with the business, you can deal with it with guidance from the operating agreement.
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Developing an operating agreement could be tedious at times. Besides, since it deals with how your business operates, then it would be best to have professionals help you with it to make sure you get everything right. Getting help from registered agents would be your best bet. Here are three of our best LLC services that can provide you with registered agents to free you of worries:
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Importance of a Virginia LLC Operating Agreement
Virginia’s law does not require the formation of operating agreements for LLCs. The majority of states require their businesses to draft an operating agreement that allows them to inspect the business structure. In Virginia, you can skip this step while creating the LLC and it won’t attract any fines from the law.
You should not skip this step if the goal is to protect the members of your business from misinterpretations and negotiations. Here are a few reasons why you should write an LLC agreement.
- To protect the business: The operating agreement defines the rules of an LLC. In other words, the rules are enforced by the government if members fail to adhere to the rules. This arrangement can be used to save the LLC from being governed by the government’s rules and offer additional advantages.
- An LLC makes it look trustworthy when investors look at companies they always evaluate how professional the company looks. And the operating agreement makes the LLC so professional because it shows that the members care about the company and they want to make all the rules and regulations legit as well. This creates growth for the company by attracting investors.
- The LLC’s status has to be secured LLCs are well-known for their limited liability status. If the operating agreement clearly defines this, the government will not be misunderstood. Because it is very easy to misunderstand a one-member LLC with a sole proprietorship, but an operating agreement can demonstrate that they are distinct.
- To settle any conflicts: In the future, there could be disagreements over distributions and decisions. The operating agreement defines the procedures and requirements for each member of the company. If a task is required members are able to consult the operating agreement for specifics and then move on.
- LLC flexibility is possible thanks to Limited Liability Companies. Operating agreements allow these LLCs to have this type of nature. The validity of the operating agreement provides the LLC with the freedom to operate.
- To open bank accounts in your company, you’ll require a copy of the operating agreement. At the moment when a business does not have that, it will be hard for the company to open an account with a bank.
In order to clearly state the purpose of a business as well as its ownership interests, a written operating agreement is strongly advised in Virginia.
You and other members of the LLC will be unable to reach any agreements if you do not have an operating agreement. Even worse, your LLC must follow the state’s default operating conditions.
It is required by law in California, New York, Maine, and Missouri, but it is not in Virginia. Although it is not legally required, creating a written agreement is strongly advised. You may self-notarize and distribute the documents.