Kentucky LLC Operating Agreement is a formal document deal with factors that ensure a company’s daily operations, such as ownership, operating procedures, and decision-making.
As business owners, your business can operate within the state of Kentucky without the LLC operating agreement. However, you must approve the LLC operating agreement. Unfortunately, many business owners have not properly utilized this formal document because they do not understand its importance. Kentucky LLC operating agreement provides business owners with protection and incentives.
A Kentucky LLC operating agreement is a legal document where business owners or managing members of LLCs can outline the operations and policies that govern the company.
An operating agreement adds formality to the business agreements for Kentucky LLCs whether they are registered to single owners or several owners usually called members. This formal agreement discusses critical issues including ownership structure, operating procedures, and decision-making process in terms of daily operations of the business.
Discover why you should get your business an LLC operating agreement and the importance of formalizing this document to your business. Learn how to form the Kentucky LLC operating agreement for your company in this article.
Kentucky Limited Liability Company Act – Chapter 275
Operating Agreement Laws – § 275-180
Definition – § 275.015(21)
Types of Agreement
LLC helps you draft the operating agreement for your business and ensure that your business is protected and provided with incentives. The type of the LLC operating agreement depends on the number of members involved in the company’s management.
Single-Member LLC Operating Agreement
If you are a sole business owner, this type of LLC operating agreement is for you. The purpose of an LLC operating agreement is to outline policies that support the vision of your company. It also protects your financial assets.
Download: Microsoft Word (.docx)
Multi-Member LLC Operating Agreement
If more than one person is involved in the management of a business, this type of agreement is best suitable. This agreement outlines the policies that will guide its operations, and all members must formalize them. While it is not deemed compulsory, business owners should implement the Multi-Member LLC oerating agreement.
Business owners must formalize this agreement to protect their company from business struggles like bankruptcy and litigation.
Download: Microsoft Word (.docx)
Importance of the Agreement
A Kentucky LLC operating agreement is essential to your business’s smooth operation and protection. Many business owners fail to get LLC operating agreements because they don’t understand the importance. Some of the important features of having an LLC operating agreement are:
Clarification in authority
Starting a business requires agreement. Businesses that have more than a member involved in the company’s management need the LLC operating agreement. It clarifies the responsibility towards the decision-making and outlines the direction of the business. By providing clarification in authority, the LLC aims to prevent conflicts.
Also, it ensures that the business operates properly by providing procedures for resolving disputes. It can also include penalties that will be applied if any of the owners misuse their power so that everyone remains in check. That will also help to prevent any of the owners from putting other members at risk of unnecessary litigations and any other networking marks.
Organization’s structure
The LLC operating agreement helps businesses outline the structure and the operating procedures. The formal deal includes essential details such as names and addresses, voting rights, and decision-making. In addition to all this information, the ownership and how the business will be managed are also included in the agreement. All this business information is documented to ensure the protection of every member.
Prevents state’s interference
You don’t want the state laws involved in your business, so you need the LLC operating agreement. The state of Kentucky recommends this operating agreement, and they respect it when enterprises comply with regulations. LLC operating agreement focuses on dissolution, liability, and it clearly states how profits are shared. However, the agreement is not binding on your company unless you implement it.
Flexibility
The LLC operating agreement is determined by all members involved in the management of the business. One paramount importance of the LLC operating agreement is its flexibility. It gives room to make decisions concerning the management of the company. Also, it allows businesses to decide how funds are to be distributed and when. As a result, the Kentucky operating agreement can be altered and modified.
Personal liability protection
The LLC operating agreement protects your personal and financial assets. It clearly outlines the separation of the company assets from personal assets. As a result, when the LLC is sued, your assets are not affected.
Direction for vision
Having an LLC operating agreement is essential because it helps your business outline policies and operating procedures that support the vision and mission of your company. In addition, it provides guidelines to help attain your company goals. This formal agreement contributes a lot to the success of your business, and it gives your business credibility and validity.
Voting rights
You have to state the voting rights of your LLC whether they relate to the contributions and the ownership percentages of members. This is crucial as it will protect the rights of the owners in the LLC and also offer protection in a situation where there is internal conflict or litigation for the company.
State’s recommendation
Although it is not required by law, the state of Kentucky recommends that all LLCs have an operating agreement. According to the Kentucky Statutes (revised) Section 275.015(21), every LLC in Kentucky should have an operating agreement that governs its operating procedures and activities. The operating agreement can either be written or oral.
Information to be Included
The Kentucky Limited Liability Company Act has clearly stated all the information you need to include in creating an operating agreement. Here are the significant aspects your Kentucky LLC Operating Agreement should consist of:
General information
The relevant information needed includes your company’s name, the registered office of your business in Kentucky, and the consent of a registered agent who is supposed to reside in Kentucky. Other information includes; management and principal office addresses.
Declaration of intent
You must write a short declaration of intent to affirm that the operating agreement is under Kentucky LLC laws. Your statement must also include that the operating agreement will be implemented after Kentucky’s Secretary of State has officially filed and registered the LLC.
Purpose of existence
The operating agreement must include the reason and purpose of your business and an additional statement about your aim to expand your business. Your account can consist of the nature of your business and expansion.
According to the State of Kentucky laws, you need to state that the LLC will continue its operation until the business is no longer registered.
Tax provisions
All LLCs must pay taxes known as the Limited Liability Entity Tax (LLET) in Kentucky. Therefore, if you are the sole owner of your business, you might want to include how your LLC is taxed. However, stating how you want to be taxed isn’t limited to sole business owners but a partnership, S corporation, and C corporation.
New member additions
In the operating agreement, you are to state the procedures through which you will include new members and how their operations will be governed by voting rights, profit distribution, decision-making, and company management. In essence, you are to include a clause for the addition of new members from the beginning.
Capital contributions of owners
Maintain the records of the capital contribution of all owners. In this case, you are to add the names and information of all members and the percentage of all members. All owners are to decide how the interest should be divided among all members either equally or based on the time and effort contributed.
Voting and meetings
To ensure that agendas and decisions are maintained, it is essential to create rules to conduct meetings. The amount of voting power each member has must be clearly stated. Include owner voting rights, percentages, the number needed to approve the change, and criteria for voting.
Management structure
You must also include the management structure. Clarify if the owners will be responsible for the management of the business or managers will be hired. If the business owners plan to hire a manager, the salaries, bonuses, appointment procedures, terms of services must be included.
Rules and regulations
You must state the procedures by which new members will be admitted. It would be best if you created rules guiding how members are accepted and ownership transferred and terminated. In addition, it would help if you addressed processes by which the owner’s interest will be transferred after the termination of their ownership.
Distribution of profits
You need to give details on how you intend to divide profits and losses amongst the members. In most cases, most companies distribute profits evenly amongst members. However, if you decide to distribute profits differently, you should state it clearly in the operating agreement.
Responsibilities of members
The operating agreement should outline details of the duties and responsibilities of members of the LLC to each of them. To avoid conflict, each member should have their roles clearly stated with limits to their authority. You should also include a detailed compensation plan in a situation where any of the members will manage the company. This compensation will be in addition to the profits of such members.
Dissolution
Consider what will happen should you decide to close the LLC completely. You need to come up with a procedure to manage the situation from an ethical perspective and a legal standpoint. Such closure must be fair enough to all members and also the process must meet all legal and tax requirements.
Download Free Templates
To help you make things easy, we have provided you with a sample template you can use for your Kentucky LLC Operating agreement:
Steps to Form an Agreement
There are five steps to form a Kentucky LLC operating agreement. Before you proceed to these steps, ensure that you have chosen a name for your LLC.
Follow these steps to create your Kentucky LLC operating agreement:
Registered agent
The state of Kentucky demands that all LLCs have a registered agent to act as a third party for the company. The agent must be an individual residing in Kentucky or a business entity in the state.
Complete the application
There are different application methods to choose from. For example, you can either form a new company (known as Domestic LLC) or register a pre-existing company formed out of Kentucky (known as Foreign LLC). In addition, you can decide to submit your application online via mail or in person.
Fee
Before you can complete the LLC filing process, you need to pay a fee. If you are filing for a domestic LLC, you will have to pay $40 and a fee of $90 if you are filing for a foreign LLC. If you are filing an electronic PDF copy, ensure to send the filling package by mail to the first address below.
Secretary of State, PO Box 718, Frankfort, KY 40602-0718 Or Room 154, Capitol Building, 700 Capital Avenue, Frankfort, KY 40601
Operating agreement
Business owners are to draft an operating agreement. This will help provide clarifications on the separation between company assets and the personal earnings of the ownership.
If you already have a multi-member LLC, each member must review the document before you can implement the document officially. This document can be used for single-member LLC operating agreements and multi-member LLC operating agreements.
EIN
After filing for LLC, you must apply for an Employer Identification Number to allow the Internal Revenue Service to supervise your company’s financial activity. After the successful application of the EIN, the company will pay employees and get loans legally.
You can apply for EIN by filling out an online application or you can submit an SS-4 form in Adobe PDF format via mail.
Frequently Asked Questions
Yes, an LLC operating agreement is required in Kentucky. However, the state of Kentucky allows businesses to operate without an operating agreement.
The state of Kentucky does not need you to file an operating agreement. However, the operating agreement should be kept somewhere safe and easily accessed by members after it has been created.
You should create your operating agreement before filing for articles of organization.
You do not have to file an operating agreement with the state of Kentucky. Instead of filling your operating agreement with the government, the operating agreement is a document that you should keep somewhere safe in the premises of your business.
Businesses that need operating agreements include; restaurants, car dealers, cleaning companies, Gas stations, and manufacturing companies.
