The state of Iowa advises business owners to file an LLC operating agreement that lists the fundamental operational structure of a company.
The information that an Operating Agreement carries includes how the owners intend to run the business going into the future, the operational procedures, structure of internal affairs, the roles of every member, and the model for making critical business-related decisions.
While Iowa does not necessarily require an operating agreement to consider an LLC as legal, it is highly advisable to get one for your business to facilitate organization, conflict resolution, and other constraints of operating a business.
The process of creating an LLC in Iowa involves submitting a Certificate of Organization to the secretary of state in order for your business to be recognized in a legal capacity. The state of Iowa controls the issuance of LLC operating agreements under the following laws:
Limited Liability Company Act – Chapter 489
Operating Agreement Laws – § 489.110
Definition – § 489.102(15)
Creating an LLC operating agreement can be an intricate process. Using a template is a good way of streamlining the process. In light of this, we have provided our readers with free downloadable up to standard templates that are easily customizable for Iowa LLC entities:
Types of the Agreement
Iowa has 2 types of LLC operating agreements, namely:
Multi-member LLC operating agreement
This type is applicable when multiple people jointly own an LLC. It describes the balance they reach in terms of policies, relationships, responsibilities, and equity sharing.
Download: Microsoft Word (.docx)
Iowa Single Member LLC Operating Agreement
This variant comes into play when an LLC is owned by a single entrepreneur. The document outlines vital information about the business, including its governing policies.
Download: Microsoft Word (.docx)
Advantages of the Agreement
An Iowa LLC operating agreement is not mandatory, but it brings a lot of advantages into the picture. Here are some of these benefits:
The state advises every LLC business to acquire an operating agreement to act as a guidebook in its operations under Section 489.110.
Protects the status of business
Besides adding to the wholesome credibility of your business, the document upholds your limited liability status in the eyes of the law. In the event of liability issues, the document protects you by setting a boundary that recognizes you as a member of the legal entity that is the business, thereby setting you aside as a person.
Eases the tension
With everything from policies to each member’s responsibility put down on paper, cases of conflict become rare and are easily manageable when they arise.
Solidifies verbal agreements
Verbal agreements are good enough but are weak in nature. Agreement by words of mouth is hard to suffice as it is basically what one person says against what their counterpart says. By documenting your LLC agreement, you solidify your agreement and can walk into the actual business with much more confidence.
Credibility of business
The document legitimizes your business and presents you as an organized entrepreneur. Upon proving the existence of an operating agreement, third parties who may be interested in engaging with your business will be convinced that you conduct your business in an organized way.
Stops interference by the state
Operating an LLC void of an operating agreement automatically means that you are at the mercy of the state’s laws. On the other hand, filing an Iowa operating agreement means you can set your own rules and policies for major events, such as a change of ownership. A good example is when one member suddenly dies without filing a will.
The state laws could rule that the deceased’s equity goes to their family. On the other hand, an operating agreement may guide that the equity is shared among the remaining members and that they should compensate the family of the deceased for the same.
Increases the flexibility
An Iowa LLC operating agreement adds to the flexibility that comes with owning an LLC. With this document, owners have the mandate to personalize further the experience of running their business especially when it comes to critical decision making. It is also worth noting that when compared to a corporation, reporting and tax requirements of an LLC are easier and less complex.
Information to be Included
Your Iowa LLC operating agreement should feature the following details:
Organization and LLC name
This section shows the owners of the business, the date the business was officiated, and the terms of ownership for each member. Similarly, the section should display the name of the LLC, making sure it corresponds to the name on your certificate of organization you filed earlier.
The description of how the company is divided depends on what the owners agreed when they were bringing the business into life. When documenting the ownership, be sure to indicate the percentage equity assigned to each member. In most cases, the capital each member avails determine the size of the cake they own.
The owners may decide to run the business operations themselves (member-managed LLC) or employ a manager to perform the tasks on behalf (manager-managed LLC). Your operating agreement should outline these preferences in detail.
Every member or manager has a critical role to play in order to collectively realize the goals of the business. The document should establish these roles and contributions as earlier deliberated. The obligations of members should be clearly indicated regardless of their contribution to the day-to-day activities.
This means including every detail, even if the only duty a specific member will be performing is to attend meetings to discuss the operating agreement itself.
Voting rights and responsibilities
Owners utilize the democracy of voting to make critical decisions pertaining to the business. Given the seriousness of the subject, the document should outline the voting power of each member. The document also needs to highlight which decisions shall be made by a majority vote and which ones shall require unanimous decisions.
In the case of manager-managed LLCs, the operating agreement should point out the manager’s power in making critical decisions, and spell out the occurrences that shall call for the intervention of owners. If an LLC assigns voting power based on the ownership structure, a member who harbors three-quarters of the equity will enjoy 3 votes while the one who owns a quarter of the company’s equity will have one vote.
When it comes to contributions, the document should clearly indicate the magnitude of each contribution, being keen to highlight the corresponding values. Non-monetary contributions such as labor, skills, and property should be included as well. Members should not forget to include information about the procedures for sourcing more capital if the future brings up such necessity.
Distribution of profit and loss
Members need to document how they intend to share both losses and profits. More often than not, the distribution criteria depend on the ownership interest based on the capital contributions. A complete operating agreement should also indicate the time for profit distribution, like at the end of every quarterly financial report.
Holding member meetings
Similar to how corporations arrange meetings for stakeholders, LLCs should hold meetings for the owners. The owners should hold a discussion to describe the scenarios that will require them to meet.
This segment should shed light on dynamics such as which meetings shall be virtual and which ones shall require face-to-face interaction. Face-to-face meetings are critical because they facilitate participation by members who are not present for day-to-day activities, more so in a manager-managed LLC setting.
Buyout and buy-sell rules
Assuming that all goes as imagined, there may come a time when the members want to bring new members into play. The Iowa LLC operating agreement should capture the procedure for opening the door to new members, not forgetting how much they would be required to contribute given the size of the business at the time.
In the same spirit, owners should include clauses about what should happen should a member decide to quit and sell his share of the company. Are they allowed to sell to anyone, or must they sell to the remaining members?
Planning for succession
The document should address what to follow in the event of the death of a member. Does the equity go to the deceased’s family or other LLC members? If it goes to a family member, will the voting powers change? These are some of the questions that this section should answer.
The operating document ought to cover the possibility of the closure of business in the future. Will the members need to vote to kickstart the process of closing doors? The document should explain the procedures to be undertaken should such a time come.
The activities surrounding business closure include conducting tax returns, liquidating existing assets, settling debts, and more. Deliberating on these activities will give everyone an easier time if that time ever comes.
Prudent LLC owners do not prepare rigid and final operating agreements. Since the future is uncertain, owners should allow for amendments in order to fall in line with future developments. As such, the document should contain information about the procedure for amending the operating agreement, including but not limited to voting protocols.
There have been times when an entire operating agreement has been rendered useless due to the existence of a mistake in a specific part of the document. Owners can avoid such tragedy by including a severability provision. The clause holds that each part of the document stands on its own such that if a mistake leads to the dismissal of a particular section, the remaining parts will remain functional.
Coming up with an LLC in Iowa starts with confirming the availability of the chosen name. Once you have confirmed that the name is available for your taking, move on to register using the following guideline:
How to Form an LLC in Iowa?
Following are the steps to form an LLC in the Iowa state:
Step 1: Find a registered statutory agent
Your preferred agent could be a business or an individual, provided they are licensed to carry out their work in the state of Iowa. Their work is to receive the company’s vital documents like the annual state filings.
Step 2: Preparing registration documents
The state of Iowa requires locally formed LLCs to independently prepare their document as long as it satisfies § 489.201 of the revised uniform limited liability company act. On the other hand, existing LLCs that want to start operating in Iowa can download the Certificate of Authority as required by state law.
Step 3: Meet fee requirements
Iowa has set a fee of $50 for domestic LLC and $100 for foreign LLC that should be paid via check to the secretary of state.
The state also requires foreign LLC applicants to attach a certificate of existence from the authorities in their first state of operation. The certificate must not be aged more than 90 days from the time of the application.
After you have prepared everything, send your application to:
Business Services Division, Lucas Building, 1st Floor, Des Moines, IA 50319
Step 4: File the agreement
Owners may opt to put together an operating document that acts as a constitution to govern their relationship as business partners.
Step 5: Get an Employer Identification Number
Preparing an operating agreement from scratch is not a walk in the park. We have taken our time to come up with multiple, fully customizable templates to help and guide you throughout the process of making your document. Be sure to use our free downloadable Iowa LLC operating agreement templates to give you an easy time as you prepare your document.
Frequently Asked Questions
While the Iowa secretary of state does not require you to provide an operating agreement, it is advisable that you come up with one because it brings into the table many advantages, like minimized conflicts.
You may create your Iowa LLC operating agreement as you await the completion of the company’s registration process. Keep in mind that some financial institutions may want to see an operating agreement before you open an account with them.
It is advisable to get a single-member LLC because it will protect you from personal liability when business disputes arise. It may also influence loan firms into agreeing to issue you the loans you request.
You are not dictated by law to include a lawyer in operating agreement preparation. That said, it is in your best interest to seek the advice of a lawyer because they may know a thing or two that you don’t.
A lawyer may also advise you on how to handle certain legal matters, and this information could bolster the quality of your operating agreement.