This week in the Freedom Friday blog we're continuing the series the 10 Steps to Starting a Small Business in Oklahoma. If you missed the blog posts for the previous steps, I've provided links at the end of this blog post to help you catch up.
In today's Freedom Friday blog, we're going to cover the fourth step in starting a small business in Oklahoma, which is to draft your operating agreement or bylaws. If you chose an LLC in the third step, choosing your business entity, then you will need to draft an operating agreement. If you chose a corporation as your business entity, then you will need to draft your bylaws.
Every LLC needs an operating agreement, and every corporation needs bylaws. These documents are very important and vital to the success of your small business. While there are online resources to help you draft these on your own, it is always best to consult with an attorney to help you draft your operating agreement or bylaws.
Most small businesses choose to form an LLC, and so I am going to focus on the operating agreement in this blog post. There are a lot of similarities between an operating agreement and bylaws that I will point out along the way. But first, why does every LLC need an operating agreement? Oklahoma law does not require that you have one, but especially if you're a single-member LLC, why is an operating agreement so important? There are three reasons why every LLC needs an operating agreement:
First, it is vital to have an operating agreement because this document will allow you to customize your business structure. A key provision of an operating agreement is whether your LLC is member-managed or manager-managed. The default option is a member-managed LLC, but you can elect to have your LLC managed by a manager who is not a “member” (or owner) of the LLC. This practice is common with multi-member LLCs. Also, if you have a multi-member LLC, your operating agreement should describe the roles and responsibilities of the members of the LLC (the owners) and explain the process of making decisions in the event the members of the LLC disagree. Further, the LLC should have a buy-sell provision, which explains how the LLC will handle the situation if a member of the LLC leaves the LLC. This provision is similar to a pre-nuptial agreement prepared before a couple gets married.
Second, every LLC needs an operating agreement because you should avoid Oklahoma's default rules for LLCs. Oklahoma LLCs are governed by the Oklahoma Limited Liability Company Act. The Act is not necessary a bad statute, as it provides you the opportunity to form your LLC. However, if your LLC does not have an Operating Agreement, the rules for governing your LLC default to the Act… which says very little about running your business and gives very little guidance which you need an operating agreement to provide you.
Third, it is essential for your LLC to have an operating agreement because the operating agreement will help give you limited liability as a member of the LLC. Especially if you have formed a single-member LLC, the operating agreement will demonstrate that the LLC is a separate entity from you as an individual business owner. If you do not have an operating agreement as a business “formality,” then you may expose yourself as an individual business owner to liability, even after forming the LLC.
Now that I've explained why it is essential to draft an operating agreement (or bylaws for your corporation), here are seven key provisions every operating agreement or bylaws should include:
- Every operating agreement or bylaws should include the business name, address of the principal place of business, and registered service agent.
- For an LLC operating agreement, whether the LLC is member-managed or manager-managed; describe the duties and responsibilities of members and mangers, and if a multi-member LLC, include a buy-sell provision in the event a member of the LLC leaves the LLC. If you're drafting your corporation's bylaws, you will need to describe the duties and responsibilities of the board of directors for the corporation, and also include a shareholder's agreement, especially for closely held corporations.
- Taxation: Regardless of whether you chose to form an LLC or corporation, the business entity needs to make a tax election with the IRS. An LLC can elect to be a pass-through entity, or elect S-corporation status. Similarly, a corporation can elect to be a S-corporation or a C-corporation. This election should be addressed in the operating agreement or bylaws. Before making this decision, it is best to consult with an attorney and/or tax professional.
- Distributions: Especially for an LLC, you can set a specific schedule for distributions, or the member(s) of the LLC can take a distribution at will.
- Whether actions taken by members of the LLC (or shareholders in a corporation) must be consented to in writing.
- Provisions for dissolving the LLC or corporation.
- How to amend the operating agreement or bylaws in writing.
There are online resources available to assist you in drafting your operating agreement or bylaws, but as always, it is best to consult with an attorney to help you draft these important documents. Even if you're a single-member LLC, most attorneys will charge a reasonable flat fee for a business startup package.
If you've missed the blog posts for the previous steps, here are some links to get you started:
Step 1: Develop a Business Plan
Step 2: Gather Your Team
Step 3: Choose Your Business Entity
If you're interested in starting a small business anywhere in Oklahoma, or if you have a small business and you are looking to grow, please feel free to contact me at [email protected]. For more information about Liberty Legal Solutions, LLC, please visit our website http://www.libertylegalok.com.