An Ohio LLC Operating Agreement is a document used to outline the governing rules (policies), responsibilities of members, and standard operating procedures such as capital contributions, voting rights, etc., of LLC businesses in Ohio.
The operating agreement acts as the “constitution” of the LLC, and an LLC operating without one is subjected to default Ohio state laws. LLC state laws are curated for all LLCs, hence the need to create an operating agreement specific to the entity. The document is legally binding, but it is not legally required in the state of Ohio. Applicable laws in creating an Ohio LLC operating agreement are:
- Limited Liability Companies: Chapter 1705
- Operating Agreement Laws: § 1705.081
- State Definition: § 1705.01(J)
An operating agreement offers protection to the members of the LLC and their assets as well as the entity itself such that legal and financial liabilities of either party cannot be transferred to the other party. Thus, the document is essential in preventing disagreements on how the business should be run.
Types of Operating Agreement
There are two (2) types of LLC operating agreements. They differ based on the type of LLC they are curated for. The types of Ohio LLC operating agreements are:
Single-member LLC operating agreement
An agreement used by the owner of a single-member LLC; a type of ownership where the company has one sole owner. The document indicates that the owner has full ownership of the LLC and how they plan to manage the business. Additionally, they are able to separate their assets from the company through the document.
Download: Microsoft Word (.docx)
Multi-member LLC operating agreement
An operating agreement meant for multi-member LLC businesses where more than one individual owns the entity. It is binding between all members of the LLC. A multi-member operating agreement notes down how the members have agreed to run the company, share profits and distribute ownership. Through the document, the LLC members’ personal assets are exempted from any financial and legal claims against the LLC.
Download: Microsoft Word (.docx)
Reasons to Make the Agreement
An Ohio LLC operating agreement has multiple uses in operating an LLC. This article will discuss various reasons why LLC owners in Ohio should consider creating an operating agreement for their business. They include:
Recommendation of state
Through the Ohio Revised Code Section 1705.081, Ohio LLCs are recommended to use operating agreements to have more control over their internal affairs. Failure to which the LLC company will be subjected to default LLC state laws.
Conflict prevention
When running a business, different disputes are bound to happen regarding different aspects of the business, such as capital contributions, voting, ownership, etc. However, since all the guiding rules of the LLC are written down in the operating agreement, each LLC member knows what is expected of them, and thus conflicts can be prevented.
Protection of liability status
An operating agreement further strengthens the limited liability privilege awarded by an Ohio LLC structure of a company. With an Ohio LLC operating agreement in place, courts and other parties such as creditors are further incentivized to observe the limited liability status of an LLC entity.
Additional protection
LLC members are further protected from the financial liability of the LLC. An LLC operating agreement ensures that the member’s assets are separate from the entity’s. Therefore, any claims made against the entity cannot be assumed by the LLC members.
Verbal agreement
An Ohio LLC agreement has to be in writing. It is because written documents have more credibility in court and are easier to implement, unlike verbal agreements, which have to be committed to memory which can vary from time to time.
Detailed rules
Crafting an LLC operating agreement specific to the entity at hand presents an opportunity to the members to get into more specific details of the LLC than state laws which offer generic stipulations. This ensures the specific company’s interests are protected.
Flexibility control
With an LLC operating agreement in place, members of an LLC can have more control over any minor aspect of running the company. In addition, any probable issue of dispute can be addressed ahead of time in an LLC operating agreement.
Easy banking
Financiers in Ohio, such as banks, will generally request an operating agreement before an LLC can open a bank account or borrow money. The document is essential in verifying the credibility and legitimacy of the LLC. Additionally, an operating agreement can prove how well an entity is organized and planned and its management structure, which is critical in running a successful business.
Information to be Included
The members of the LLC get to determine what will be included in an LLC operating agreement. Consequently, the agreement varies from one entity to another. However, essential information that should be presented in an Ohio LLC agreement are:
LLC name
The entity’s official name should be written as presented in the Articles of Organization during the business registration. In addition, the LLC designator must be included. Other details such as the official physical address (headquarter office) and purpose of the LLC can be added.
Ownership
All the owners of LLC are listed in the agreement accompanied by their percentage ownership. Ownership can be equally distributed among members in a multi-member LLC; however, it is divided depending on the capital, time, and effort contributions in other cases. The total percentage must sum up to 100 percent.
Management structure
An LLC entity can be member-managed or manager-managed. The management structure adopted by the LLC needs to be defined in the operating agreement. In a member-managed LLC, the owners carry out the majority of the managerial duties.
In a manager-managed LLC, managers selected from the members or sourced externally are appointed to oversee operations. In a manager-managed LLC, the managers’ names and any interest (ownership) in the company should be outlined.
Duties of members
The roles/authority of the members or managers ought to be explicitly declared. Each party should be aware of the role they play in the company. Typically, an appointed manager will have to be compensated with a salary.
Voting rights and responsibilities
An Ohio LLC operating agreement must clarify how the voting rights in an LLC have been awarded. Other factors of voting that need to be addressed are who is allowed to vote, the members, managers, or both, the minimum votes required to pass a motion, and the weight of votes. In addition, the power of the votes can be equal or varied depending on factors such as ownership percentage, contribution margins, etc.
Contributions
Capital contributions will vary from one situation to another. LLC members can invest equal proportions or depend on their financial ability. The exact amount contributed by each member should be specified. Additionally, it should be clear how additional funds will be raised in the future.
Distributions
The operating agreement is expected to define how profits are distributed among members. For example, profit distributions can be based on ownership percentage or financial contributions. Other outlined aspects are what percentage of profit will be injected back into the business, frequency of distribution, payment method, and the person responsible for distributing the profits.
Holding meetings
Meeting procedures and policies ought to be defined in the agreement. Holding meetings is not mandatory for LLCs in Ohio; however, it good practice to conduct scheduled meetings such as AGMs. The criteria that would necessitate an emergency meeting should also be defined.
Buyout and buy-sell rules
Sometimes, it might be necessary to assimilate new members or release existing members in an LLC. The agreements should outline the procedure for taking up and releasing members. Often new members have to make a specific contribution.
In contrast, departing members have to be compensated for their stake in the LLC, and their ownership percentage is then distributed among the remaining members.
Successful planning
A wholesome LLC operating agreement needs to anticipate the passing away of a member (owner) of the entity and how they are to be succeeded. Therefore, a succession policy should be provided, directing a departed member’s share to be transferred to their preferred heir or surviving members.
Dissolution
An Ohio LLC operating agreement ought to direct how the entity can be dissolved if need be. Details such as what would lead to dissolution, how assets and pending debts will be distributed among the members should appear. In addition, the person responsible for filing the Certificate of Dissolution should be identified by name in the agreement.
Modifications
Changes to the operating agreement will sometimes be inevitable. The agreement needs to anticipate such cases and direct how modifications are agreed upon and the person responsible for preparing the amendments. Modifications will often have to be voted on.
Severability provision
It is not uncommon to find that guidelines issued in an LLC operating agreement to be contrary to Ohio state laws or have errors and thus unenforceable. A severability clause then needs to be added to the agreement. It declares that all other sections of the agreement remain enforceable even if a portion of the document is found to be legally unenforceable.
Operating Agreement Template
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 Ohio LLC entities:
How to Form Operating Agreement?
Executing an LLC operating agreement in Ohio can be accomplished in a few straightforward steps. The LLC must first be available for use in Ohio. Follow the steps below when using an LLC operating agreement”
Registered agent
Appoint a registered agent in Ohio who is representing the LLC’s physical presence in Ohio. The agent can be a person or an entity as long as they have a physical address in Ohio.
Type of LLC
Then, determine the type of LLC in question. Different types of LLC will require different paperwork. For example, an LLC can be domestic – formed within Ohio or foreign – previously established outside Ohio.
Required documents
Next, identify the documentation needed to register the LLC as an operating entity within the state. For example, a domestic LLC will need an Article of Organization, while a foreign LLC requires registration documents of the LLC. Filing can be done via mail or online medium in Ohio.
Fee
A $99 fee must be paid to the Ohio secretary of state for the filing process to be complete. Payment can be made online through a credit card or via mail using a check or money order. If the payment is by mail, a credit card authorization form must be added to the application.
Operating agreement
After making the applicable payment, prepare the Ohio LLC operating agreement. Ensure to cover every pertinent detail associated with running the LLC. Use an Ohio LLC Operating agreement template to simplify the process.
EIN
Lastly, apply for an EIN (Employer Identification Number). Use Form SS-4.B. The EIN is. The application can be online or via mail. An EIN, used by the Internal Revenue Service, is essential for tax filings, opening bank accounts, and hiring employees.
Frequently Asked Questions
Yes. Even though it is not mandatory in Ohio, an operating agreement goes a long way in running an LLC and avoiding misunderstandings.
Yes. However, the State of Ohio does not dictate that single-member LLCs have an operating agreement. The document is, however, still essential in operating an LLC.
An operating agreement is best crafted during the registration and formation processes of an LLC. Therefore, it can be prepared before filing the Articles of Organization or after the entity’s formation and often before opening a business bank account.
No. Operating agreements are internal documents that legally bind the LLC members without state interventions in Ohio.
An operating agreement is not recorded with any state agency in Ohio. A signed copy should be kept with company records, and each LLC member receives a copy and keeps it safe for reference.
