An Operating Agreement is Vital to Your Series LLC

We often see LLCs without Operating Agreements. And, while it’s true that an Operating Agreement isn’t specifically required by law, there are some very good reasons why you always want to have one for a regular LLC. But in the case of Series LLC, the Operating Agreement is vital.

When LLC legislation was first introduced into the United States back in 1970 (Wyoming was the first state to recognize the LLC), each state modeled its laws on a uniform piece of legislation. But since then almost every state has changed that original law, and today, the laws are anything but uniform. You’ll find the changes are especially noticeable in the area of creditor protection. Some states, like Nevada, Delaware and Wyoming, have very strong laws protecting LLC owners, whereas some other states provide little to no protection, particularly where an LLC has a single owner. But even with all of those changes, there is still one uniform constant: state laws will always defer to the language in the Operating Agreement.

If you take a look at most state laws, you’ll find language like “Unless otherwise stated in the LLC’s Articles or Operating Agreement, the LLC must …” What this means is that if your LLC’s Articles or Operating Agreement say, for example, that only certain Members may vote, then only those Members may vote. If voting rights became an issue between Members, a court or arbitrator would first take a look at what state law said versus the language in the Operating Agreement. If the Operating Agreement language was found to be fair and the Members were found to have consented to the voting restrictions freely, it would be hard to have that part of the Agreement overturned.

But if your LLC doesn’t have an Operating Agreement, then you’re stuck with whatever state law dictates. If state law says that all Members vote equally on all issues in an LLC (unless the Operating Agreement or Articles specify otherwise), and you don’t have an Operating Agreement, then all Members vote. You may have had a verbal agreement with your Members on who can and can’t vote, but verbal agreements are notoriously hard to prove in court.

That’s hard enough in a simple LLC, but now imagine what would happen with a Series LLC, where state law and case law aren’t fully developed. The more Cells you establish, especially if you have different management and ownership, the tighter your Operating Agreement needs to be.

In fact, because each Series Cell is going to operate independently, we strongly recommend that you create a separate Operating Agreement for each Cell. Remember, the Series LLC’s Operating Agreement deals with the overall operation of the Series LLC. It tells you how you can create and dissolve Cells, but it also allows for each Cell to operate independently. That means each Cell needs its own guide for how the Managers operate, what rights the Members have, how profits are distributed, and so on. Otherwise, you have the same problem as before: state law may override your intentions. But the Operating Agreement for a Cell is usually pretty straightforward and much less complicated than the Series LLC’s Operating Agreement.

There are many variables when you’re structuring a business. That’s why it’s hard to go through a quick-service website. Unless you talk to someone who’s got some knowledge and experience on both the tax and the legal side, it’s hard to know what you don’t know. And that can leave you vulnerable.

Got questions? Contact us! We’re here for you.

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