The Washington State LLC Operating Agreement contains the rules and practices that the members of an LLC should follow in a bid to prevent future conflicts on the operations and duties in the LLC.
While it is not legally obligatory to create an operating agreement, it is nonetheless beneficial to protect business interests and provide some clarity to the administration of the LLC. In Washington, once an operating agreement is created, the LLC must file it with the State.
In cases where an LLC does not have an operating agreement, the members will have to bear the costs arising from litigation or debts that the LLC owes. An operating agreement is perfectly suited to both sole proprietorships and multi-member LLC.
An Operating Agreement is defined by RCW 25.15.006(7) as a regulatory agreement that guides the affairs of the LLC and the conduct of its business. The operating agreement specifies the company’s financial details and its members’ roles, duties, and rights.
The legal infrastructure governing Limited Liability Companies in Washington can be traced to Chapter 25:15 of the Revised Code of Washington (RCW). These laws include Operating Agreement Laws in RCW 25.15.018.
Types of Operating Agreement
There are four types of LLC Operating Agreements applicable in Washington state. These divisions are made according to membership and leadership structure. They are discussed below:
Single-member LLC operating agreement
This type of Operating Agreement applies to businesses owned by a sole proprietor or sole manager.
Download: Microsoft Word (.docx)
Multi-member LLC operating agreement
A multi-member LLC operating agreement is adopted when there are two or more members/owners of the LLC.
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A member-managed LLC in Washington is one where the members are involved in the day-to-day administration of the LLC. In a member-managed LLC operating agreement, all the members who are also owners, have equal rights to bind the LLC to contracts they agree to.
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As opposed to a member-managed structure, in this case, managers are appointed from existing members or outside to supervise the enterprise. In a manager-managed LLC, one or more people are designated to run the day-to-day operations of the LLC. Only managers can bind the LLC to agreements they make. Members merely play a passive role in the LLC. However, members can vote on major decisions like inducting or removing a member of the LLC.
Download: Microsoft Word (.docx)
Why an Operating Agreement?
LLC operating agreements are valuable instruments to any enterprise. Considering that business is highly multifaceted, an operating agreement functions as a legal framework on which you can build all the complex policies, rights, and duties that guide business operation.
Below are practical reasons you should create an operating agreement for your LLC:
Recommendation of state
§25.15.006(7) of the RCW recommends that an LLC in the state regulate its business activities by having its members create an operating agreement.
Protect LL status
An operating agreement ensures that members remain legally separated from the LLC. That way, members’ assets will not be lost to the company’s liability. Additionally, for single-member LLCs, an operating agreement makes it easier to have courts in Washington sustain the limited liability nature of your business. It also adds considerable credibility to your business.
Since an operating agreement sets out the respective privileges and obligations of members to an LLC, it eliminates the possibility of members having disagreements regarding the company’s operation.
LLCs are very flexible in terms of their management structure, record-keeping processes, and several other operations. This flexibility may raise problems of inconsistency or regular disagreements, if not clearly documented. By creating an operating agreement, you can prescribe flexible policies and rules that will regulate the unique activities of your LLC.
Protection of agreement
Having an LLC operating agreement means that the specific rules you set out will regulate your business instead of generic state laws that may be incompatible with your business goals.
Oral agreements on how an LLC should run can lead to disagreements or conflicting narratives in the future. However, with a written operating agreement, all verbal agreements are set out in explicit terms, and they are enforceable in court. This way, all parts of the agreement are binding and clear for all members to follow and enforce.
Mindset to initiate a business
Drafting an operating agreement sets forth the policies, values, and goals of a business. These sections of an operating agreement help LLC members understand the reasons for the company and pursue the administration of the LLC with a proper mindset.
Many financing institutions and bank require operating agreements before they can offer lending or banking services to LLCs. Therefore, having an operating agreement is instrumental for an LLC to open a business account and line of credit.
Information to be Included
When drafting an LLC Operating Agreement, you should pay attention to several details. That said, here are several provisions and sections that are necessary for you to include in an LLC Operating Agreement.
This provision encompasses all the details relating to the company’s formation. These details are not exhaustive, but they include the members, the date of formation. In addition, the percentage of ownership accruing to each member in the LLC can also be included under this section. Multi-member LLCs may either operate equally shared ownership rights or have members own specific units of the shares.
The name on the Operating Agreement should be the legal name of the company. The LLC name should also correspond with the designation on the Certificate of Formation used in Washington. Proper naming is essential for the enforcement of the agreement at court and not merely for identification purposes.
This section requires the full details of the company’s owners. More specifically, the names, addresses, and percentage of ownership of each member should be provided. In Washington, there is no regulation on the share percentage each member can enjoy. So, you are at liberty to decide that.
An operating agreement should contain the management structure of the LLC. As highlighted above, an LLC can be member-managed or manager-managed. Whichever management structure applies to your LLC, be sure to spell them out.
This section should include the names and responsibilities of every manager. If they have ownership or special interest in the business, the operating agreement should also indicate that. In addition, the powers of these members and managers as well as their respective rights to vote should be included.
Duties of members
Another information required in an operating agreement is the duties owed by members in their respective capacities. Depending on the administrative structure, the responsibilities of members and managers may overlap.
Again, however, it is best to set forth the roles of each individual, even down to the most basic business activities. The participants responsible for organizing meetings, the members obligated to attend each meeting, and the members to ensure proper documentation of events are some terms that should be a part of an Operating Agreement.
Voting rights and responsibilities
Voting on business decisions is quite indispensable in an LLC. As such, an operating agreement must stipulate powers of voting and the weight attached to each vote. Accordingly, every minute detail about voting should be considered, and rules provided to guide them.
A capital contribution is simply the investment of each member into the LLC. Accordingly, the agreement should include the contributions of each member and measures for future contributions to the company’s capital base by new or existing members.
This part of the agreement relates to the formula for sharing profits and losses among members. It also stipulates the timeline for distribution. The distribution section should also clarify the tax obligations of members on distributions. This clause is essential because LLCs are generally pass through entities, meaning members pay personal tax on their contributions while the corporation is not taxed in that capacity.
However, if members plan that the LLC pays tax as a corporation, the operating agreement should include that clause. Whatever the case may be, all the provisions under this section should be unanimously agreed by the members.
As the name implies, this provision governs the tax accruing to the company and the payment schedule of taxes. As an LLC, your company can opt to pay taxes via the personal income tax member distributions or pay taxes as a corporation.
An operating agreement should dictate the regularity of meetings and the rules guiding the conduct of these meetings. This section of the agreement is also an excellent place to stipulate the procedure for special meetings like Annual General Meetings and the role of members during these meetings. This provision is essential because annual general meetings are crucial and a wonderful avenue to deliberate on important issues.
Buyout and buy-sell rules
Buyout and buy-sell provisions dictate the rules guiding the exit of a member or the admittance of a new member. This section will consider the compensation of a departing member for his ownership percentage. It also sets forth how ownership should be reallocated and the contribution of a new member to the company’s capital base.
Here, the applicable principles in the case of a member’s death are spelled out. Remarkably, the possibility of passing ownership to family members or otherwise should be contained in this section. In addition, the proper procedure for the succession of ownership to be operative is also a necessary detail.
This part of the agreement sets out the conditions for the company to cease and how the state Certificate of Dissolution is to be filed. Very importantly, the dissolution segment should cover the procedure to dissolve the LLC. For example, should dissolution be by a unanimous or a majority vote.
Additionally, the operating agreement must clarify whether members still interested in the LLC can stay while buying out the shares of leaving members. Finally, this provision must delineate the sharing of outstanding debts and assets upon dissolution.
There is a high chance that the mode of business operations may change over time. Invariably, these changes may require you to alter specific provisions of the operating agreement. This clause exists to stipulate how those modifications may occur and under what circumstances they should be allowed.
Where there are errors or invalid clauses in an operating agreement that makes them unenforceable, a severability provision keeps the whole agreement from being void. Severability provisions state that each provision in the agreement is independent of every other, and the agreement should continue to apply even if some part is invalid.
Operating Agreement Template
If you intend to get an LLC operating agreement for your company, you can find a free downloadable template below. You can edit and customize this template to fit your business needs. However, we advise that you have your attorney review your agreement.
How to Form Operating Agreement?
Before filing for an LLC, it is essential to ensure that another registered company is not using your proposed business name. So, it is advisable to conduct a business name search within the online records of the Washington Department of Revenue. If you can ascertain availability, here are steps to proceed to form an LLC and, subsequently, your operating agreement.
Find registered agent
Your LLC must appoint an individual residing in the state or a Washington company to act as its agent. The agent acts as a contact person in case of legal correspondence.
In this step, you will conduct an online application after identifying your LLC type. You can either apply as a new domestic LLC or a foreign LLC existing in another state. A foreign LLC is to attach a Certificate of Existence to its application.
The processing fee for applications is $200 when done online or $180 by paper.
The next step is to create your LLC operating agreement, setting out the privileges and responsibilities of members. This step is recommended when the LLC is already filed at the office of the Secretary of State.
The LLC is to apply for an Employer Identification Number either online or by submitting Form SS-4 to the Internal Revenue Service. The EIN makes it possible for the LLC to transact in its capacity, including paying salaries and applying for loans.
Frequently Asked Questions
Generally, an LLC is not mandated to have an operating agreement. However, to ensure the smooth operation of the enterprise, Washington state recommends that LLCs create an operating agreement.
There is no stipulated time to create an operating agreement. However, you may draft one before getting your Certificate of Formation or wait until all business formation processes are finalized.
Yes. You should file Operating Agreements with the State Authorities and also ensure members have access to the document.
Your LLC needs the operating agreement to facilitate the administration of the business and spell out the rights and duties of members. Also, banks, investors, and lenders may require an operating agreement to provide some services to the LLC.
There is no requirement to notarize an operating agreement in Washington. The document is binding once members sign it.