Once you have completed all the requirements for creating your LLC in Illinois, you are entitled to a sigh of relief. But don’t rest too long before you move on to drafting your operating agreement.
It is true that Illinois does not require you to file an operating agreement with the state, or even to have one on hand. It is also true that many financial and business experts strongly suggest you create such a document so that the way in which business is conducted is carefully spelled out so that all members, even if you are the sole member, know what is expected and how problems that arise will be solved.
There are a lot of reasons for you to have an operating agreement. In this blog, we will explain what an operating agreement is, why you should have one even though it is not required by Illinois law, and what the consequences may be for your business if you don’t have one.
An operating agreement is a legally binding contract that defines how the business is structured, who the owners are, what operational procedures the owners have agreed to, and the role and responsibilities of each owner. All who sign the document are bound by its terms. It is an internal document and is not filed with the state of Illinois.
The document is created by owners and defines the purpose of the LLC and clearly spells out the directions the LLC will take. It also explains how disputes will be handled when they arise, how the profits and losses will be distributed, what happens if there is a change in ownership, and other significant details of the daily operation of the business.
The operating agreement protects LLC members from disputes by clarifying how the business operates. It makes sure that all members agree with how the business is run. If there is no operating agreement, disputes are resolved by default to state laws, taking away the decision-making from the LLC members.
There are many benefits to having an operating agreement. A few key benefits are:
Although an operating agreement is not required by Illinois law, such an agreement makes it easier to:
If you do not have an operating agreement when a dispute arises, there is a default to state laws governing your business which may have results diametrically in conflict with your wishes and which might even be unfair. For example, if the LLC dissolves, the state will divide profits and losses among all owners equally without regard to how much each one invested in the business.
There are no rules about what should be included in the operating agreement, but there are some sections that are generally included. Some of those are:
If you do not have an operating agreement when a dispute arises, there is a default to state laws governing your business which may have results diametrically in conflict with your wishes and which might even be unfair. For example, if the LLC dissolves, the state will divide profits and losses among all owners equally without regard to how much each one invested in the business.
Since an operating agreement is not required by Illinois, there are no specific legal requirements for its creation, but there are generally certain steps that are followed when drafting the agreement.
You may create this agreement yourself. Many online sites provide templates you might find helpful. Keep in mind that templates are not specific to your business. You need to have an operating agreement that includes the key components listed above with specific information about how it applies to your business.
The operating agreement must be signed and dated by all members for it to be effective. Copies are then distributed to all members.
It is strongly encouraged that you consult a legal professional who is experienced in creating operating agreements for businesses in Illinois. An online LLC formation service can also assist you in creating your operating agreement.
Since Illinois does not require an LLC to have an operating agreement, the only considerations are really how state laws which are used for issues such as division of profits and losses may not be fair when applied to your business if there is no operating agreement.
The default rule is that all members have an equal vote. This may not be fair if you expected voting to be contingent on the amount of investment an owner has in the business.
Creating an operating agreement for your LLC protects your interest in the LLC. When all members know their roles and responsibilities, disagreements are minimized. An operating agreement makes it easier to deal with banks, investors, and other professionals.
Chaos is prevented when all know the details of how the business is managed, how disputes will be resolved, and how profits and losses are divided, the business runs smoothly.
Now is the time for you to take the next step. Either consult a business attorney or use an online LLC formation service. We can help you create your LLC including the steps to take for you to create your operating agreement. Contact us for more information.
Illinois does not require an LLC to have an operating agreement. In fact, only five states require an operating agreement to be filed with the Secretary of State (California, Delaware, Maine, Missouri, and New York).
Even though an operating agreement is not required, it is strongly recommended that businesses create one. The agreement defines the roles and responsibilities of each member, how the decisions are made, how the business is managed, and other important details of operating the LLC.
The short answer is yes. The long answer is that you should either consult a business attorney about creating your operating agreement or use an LLC formation service such like us to assist you with it.
If a business dispute arises, one member dies or wants to leave the business, the business dissolves, or a number of other business problems arise and there is no operating agreement, the issue is resolved by default to state law. This may turn out not how you would like it to. For example, if the business is dissolved, profits and losses are divided equally among all members without regard to the amount of their investment.
Even single-member LLCs need an operating agreement. Clarifying how the company operates is evidence that the LLC is operating as an LLC and not as a sole proprietorship. This protects the member’s personal assets from being reached by business creditors. Many banks require an operating agreement for opening accounts or qualifying for loans.
Although Illinois law does not require you to have an operating agreement for your LLC, if you decide to have one, the law does require you to keep the agreement on file at your principal place of business or at another location that is specified in the operating agreement itself. The operating agreements for the three most recent years must be kept.
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