An Arkansas LLC Operating Agreement is a legal document that establishes the business arrangement among the members of an LLC by outlining the LLC’s financial and operational management structure.
Arkansas State Code Title 4, Subtitle 3, Chapter 32 governs small businesses such as LLCs in Arkansas, and the subsections § 4-32-102(11) and § 4-32-405 layout the provisions for Operating Agreements.
One of the most important uses of an Operating Agreement is to help separate the business from the members, making sure that members’ personal assets are not affected in litigation against the business. There are also added tax benefits that LLCs and LLC members gain from an Operating Agreement
An Arkansas LLC Operating Agreement is not a document that requires filing by the state; instead, it functions as an internal document meant to guide the continuous operation of the LLC. However, the state requires companies to file annual franchise reports latest by May 1 each year. This filing carries an annual charge of $150, and an additional $5 if filing method is online.
An Operating Agreement contains critical provisions such as details about the members of the LLC and the percentage they own thereof (i.e., their membership interest). In addition, it sets out the management of the LLC, tax details, and the distribution of profits and losses among the members.
Types of the Agreement
An Arkansas Operating Agreement can be of two types; Single-Member and Multi-Member. The descriptions are given below:
Single-Member LLC operating agreement
This is applicable when a single individual owns the LLC. The document protects the business owner by helping to reinforce the LLC’s status as an independent entity from the owner’s personal assets.
Download: Microsoft Word (.docx)
Arkansas Multi Member LLC Operating Agreement Template
This is applicable when an LLC has two or more members. It outlines the details of the members and specifies the interest of each member. In addition to detailing the daily operational procedures of the LLC, it also describes the allocation of duties and authorities among the members.
Download: Microsoft Word (.docx)
Reasons to Create the Agreement
Operating Agreements help LLCs in many ways that are described below.
Arkansas State, through Section 4-32-102(11) of the state code, recommends that all members of an LLC should enter into a written operating agreement.
Preserve LLC status
An LLC Operating Agreement helps preserve the LLC status of a business entity, differentiating it from its members. This is particularly useful when a business faces legal actions. In addition, an LLC Operating Agreement will help ensure that the members’ assets remain untouched.
For a multi-member LLC, an Operating Agreement sets clear terms regarding every member’s authority, role, and responsibilities, thereby helping to prevent future disagreements.
Formal verbal agreements
Agreements penned down are easily referable when one party acts contrary to the provisions. Having an LLC Operating Agreement helps to eliminate cases of blurry recollections of business arrangements.
Protection from state’s interference
An LLC without an internal Operating Agreement subjects itself to the default Arkansas LLC laws. An LLC Operating Agreement gives businesses the freedom to set their desired terms and conditions. For example, the default state law may prescribe an equal split of profit among LLC members in the event of dissolution.
However, with an LLC Operating Agreement in place, members have the freedom to share profit with pre-established percentages.
Flexibility in LLC
An LLC is a very flexible type of formal business when compared to others. For example, the conditions (like mode of management, report filing, and tax conditions) attached to running a corporation are quite tougher than those of an LLC. An LLC Operating Agreement is responsible for this flexibility, as it allows every aspect of an LLC to be tailored.
An LLC Operating Agreement gives an outlook of legitimacy to a business, reassuring third parties of the professionalism involved in running the business. As a result, banks, investors, and other interested parties often ask to see a business’s LLC Operating Agreement before committing their funds to the business.
Information to be Included
LLC Operating Agreements are never the same. Even where the businesses are similar, the LLC Operating Agreements are still unique, given that they address each business’ particular needs. However, despite the unique nature of each LLC Operating Agreement, they all feature some essential components. These components are outlined below:
Organization and name
The business’s name should be present on the LLC Operating Agreement just as it appears in the Arkansas Articles of Organization used to form the LLC officially. This name is the official designation that the state recognizes.
It must include the complete name of the business and the words “Limited Liability Company” or any acceptable variation of the words. In addition, the Operating Agreement must include an organizational structure of the business, detailing the official creation date of the business, information on the identities of the members, and how company ownership is split.
An LLC Operating Agreement should also include a rundown of each member’s ownership of the company. This is usually decided based on each member’s contributions to the company. For a single-member LLC, the sole proprietor owns the business in its entirety.
The LLC Operating Agreement must specify the management structure of the company. For example, it should clarify whether the company is member-managed (where the members run the daily operations) or manager-managed (where the members put a manager in charge of the daily operations).
Duties of members and managers
An LLC Operating Agreement should clearly outline the specific duties and responsibilities of all the LLC’s members and managers. Not all members may be involved in the day-to-day running of a business, but these members still have obligations like attending meetings regularly, voting, etc. This section of the agreement should specify the extent of power and authority that each member and manager have and what they can or cannot do with it.
Voting rights and responsibilities
Part of the duties of the members of an LLC is voting on major decisions that affect the business. The LLC Operating Agreement should be clear on who can vote on what matters. Voting powers need not necessarily be equal and might depend on the percentage of ownership each member holds.
This section should specify the details of every member’s contribution to the business entity. These contributions can be in different forms, including monetary, skills, assets, etc.
The Operating Agreement should indicate the amount of money (if monetary) each member invested in the company and state the value of any other non-monetary investments. It should also include in its provisions the procedure to employ for future fundraisings.
This part of the agreement should state how the business will share profits and losses among the members of the LLC. For example, the business may elect to share profits and losses accrued equally or based on the ownership capacity of each member. The agreement will also state the year when the sharing will take place and the mode of disbursement.
There is no law that necessitates LLCs to hold regular meetings for members. However, it is important to hold such meetings from time to time to address arising matters.
Thus, in the operating agreement, businesses should include the duty each member owes the company to attend meetings, as some members might be reluctant to participate when the time comes. Penalty for absence from meetings may be included as well.
Buyout and buy-sell rules
The operating agreement must specify the requirements of accepting a new member (amount of capital investment, those to vote on it, etc.) and the steps to take if a member leaves, especially concerning such member’s ownership percentage, unto whom it devolves and in what manner.
In the event of the death of an LLC member, the operating agreement should specify what happens to their ownership percentage. In addition, the operating agreement outlines whether or not members can leave their stake to family or friends or if the share goes to another member.
With this, each member can make necessary arrangements in their testament to align with the terms agreed upon in the operating agreement.
Dissolution of the LLC will occur if members reach an agreement to end the business. The operating agreement must outline the procedures required for such dissolution. This will include the requirements for a dissolution to occur, the tasks necessary to ensure smooth dissolution, and so on.
When members might need to modify some provisions in the operating agreement, the operating agreement should specify and duly outline the procedure required to implement such amendments. For example, this amendment may include the addition of new members, their capital investment, duties, obligations, and so on.
This provision severs the invalidity of a part of the operating agreement and prevents such part from invalidating the entire agreement. Thus, where there is an error in the LLC Operating Agreement, such an error does not invalidate the whole document.
Arkansas LLC Operating Agreement Template
An LLC Operating Agreement is a comprehensive document that requires a considerable amount of agility during composition. An omission or error in the document could lead to future disputes among members of an LLC.
To avoid this and help facilitate the drafting of one, we have provided free downloadable templates for an Arkansas LLC Operating Agreement. However, we recommend that you use these templates in consultation with an attorney.
How to Form an LLC in Arkansas?
The first thing to do when planning to form an LLC in Arkansas is to find out about the availability of the planned business name. Prospective businesses can do this by running a search on the Arkansas Secretary of State website. After confirmation of the availability of the business name, the prospective business may proceed to file an application. An application to form an LLC in Arkansas will entail the following:
LLCs in Arkansas can be registered as Domestic or Foreign. Applications for the Articles of Organization and the Certificate of Registration are acceptable through an online portal or PDF paper forms.
All applications require a filing fee during the submission of application documents. For Domestic LLC filings, the fee is $45 online and $50 for PDF paper forms. For Foreign LLC filings, the fee is $270 online and $300 for PDF paper forms.
In addition, Foreign LLC filings require that a Certificate of Good Standing or a similar document be presented along with the application. The Foreign LLC must have obtained this document from its original place of formation.
All filings via the Adobe PDF method must include a check of the applicable fee in their application and make the check payable to the Arkansas Secretary of State. Adobe PDF filings are to be mailed to the following address:
Business and Commercial Services, 1401 W. Capital, Suite 250, Little Rock, AR 72201
While Arkansas has not made it mandatory for an LLC to create an Operating Agreement, it is highly recommended that businesses do not leave out this vital element. It outlines the rights and responsibilities of the LLC members and helps prevent any legal dispute.
Employment identification number
The Employer Identification Number (EIN) helps the IRS to identify businesses for tax matters. In addition, it further grants legitimacy to a business, enabling the business to open bank accounts, hire personnel, carry out financial transactions, etc. Businesses can apply for the EIN directly on the IRS Website or by mail with PDF Form SS-4.
Frequently Asked Questions
The state of Arkansas does not legally require LLCs to have Operating Agreements. However, due to its substantial benefits, an LLC Operating Agreement is highly recommended for businesses in Arkansas.
Yes. An operating agreement does not only outline provisions regarding membership and operations. But for Single-Member LLCs, it also protects the personal liability of the sole owner, financially separating the business entity from the owner.
We have easy-to-use templates that can serve as guides to create an LLC Operating Agreement. However, due to the unique nature of every business, and the agility needed to draft an operating agreement, we recommend using the templates under the guidance of a professional.
A business can create an operating agreement at any period during the process of formation of the LLC. However, the business information on the operating agreement must match the information that appears on the Certificate of Organization.
For this reason, it might be prudent to complete the LLC formation process before creating an LLC Operating Agreement.