If you’re a new Alabama business owner, you probably know that an operating agreement is one of the crucial formation paperwork to draft for your upcoming LLC.
To help you understand the ins and outs of an Alabama LLC operating agreement, we teamed up with our certified team of LLC lawyers with over a decade of experience.
We dedicated three weeks to in-depth research to clarify the components of an operating agreement and the best practices for drafting one.
Here's a detailed summary of everything you should know about LLC operating agreements in Alabama.
- An Alabama limited liability company operating agreement is a binding contract governing the members of a company.
- An Alabama LLC operating agreement dictates the members' roles, responsibilities, management, and voting rights.
- Adding dissolution terms to an operating agreement that guides how the limited liability company will be disbanded is important.
What Is an Alabama LLC Operating Agreement?
An Alabama LLC operating agreement is a document that details each member's ownership and describes the company's administration. The agreement should include the rules for conducting the entity's day-to-day activities as well as the obligations of each officer.
For a single-member LLC, the operating agreement allows the owner to write the day-to-day operations while remaining independent from their personal activities.
For organizations with more than one owner, the operating agreement creates the ownership and business agreement between all parties connected with the firm.
Because the agreement is not registered or documented with a government entity, each participant should preserve an original copy after signing.
The four different types of LLC operating agreements include:
- Single-member LLC operating agreement.
- Multi-member LLC agreement.
- Multi-member LLC operating agreement with 3 shareholder classes.
- Protected series limited liability company agreement.
How to Write an Alabama Operating Agreement?
To write an Alabama operating agreement, you should gather all the business information, team up with your LLC members, or consult a lawyer to draft it from scratch.
Alternatively, you can use an operating agreement template from a professional service and edit your business details.
Here's a step-by-step guide for drafting an LLC operating agreement in Alabama.
1. Layout Ownership
The first step to drafting an operating agreement is defining the ownership structure.
Typically, LLC owners contribute the first funding for the company's launch through assets, cash, or services. As a result, a share of the company assets is exchanged for each Alabama LLC member.
Ownership is divided among LLC members in proportion to their respective capital contributions. Therefore, a thorough explanation of these contributions and percentage interests should be included in the operating agreement.
Alabama LLC shareholders also earn distributive shares, or portions of the company's revenues and losses, and ownership interests for monetary contributions.
Therefore, to ensure that the ownership portion of the agreement accurately allocates assets, losses, profits, and shares, all LLC participants should evaluate it.
2. Define Rights, Obligations, and Payment
After laying out the ownership terms, the next step is focusing on the protection of the members.
Membership protection is a key component of the operating agreement. It addresses the rights and responsibilities of each LLC member, including voting, pay, daily responsibilities, performance, and satisfying standards.
Voting rights and meeting provisions are interwoven since members vote on important matters during meetings.
The voting provisions outline the members' voting shares and whether a simple majority can decide a vote.
The contract should also specify how changes to the operating agreement are proposed, decided upon, and carried out.
3.Define the Conditions for Joining or Leaving the LLC
This third step develops a process so that current and potential new members know the rules governing the joining or exiting of the Alabama LLC.
This paragraph on the agreement will describe how current members can resign and how new members can sign up. It also establishes an objective framework for approaching each of these circumstances.
4. Define Terms for Dissolution
The next step for writing an LLC operating agreement is setting the dissolution terms.
A limited liability company agreement must cover the possibility that members could sometimes disband the firm. Typically, the procedure must begin with a vote from each member. An LLC can be dissolved by completing the necessary documents, selling assets, and paying off obligations.
"After dissolution, the residual assets can subsequently be distributed among the members in accordance with the specified wind-down processes outlined in the operating agreements."
- Suzanne Rotbert, Limited Liability Company Attorney
5. Add a Severability Clause
If a particular provision of a limited liability company agreement is unenforceable, the other provisions are protected by a severability clause.
Members can disagree; if that happens, you want to ensure that the agreement's conditions still apply even if one is ruled invalid.
Key Elements of an Operating Agreement
The key components of an Alabama limited liability company agreement are:
- Basic facts about the firm: Include the legal name of the business, its address, the name and address of the Alabama registered agent for the business, etc.
- Purpose for business: This should mention your business's goods or services. Make sure to specify that any goods or services you sell are for legitimate uses only.
- A declaration of purpose: Include the company's purpose for being in business.
- Timeframe of the LLC existence: Include the duration for which the LLC is intended.
- Details about the manager and the members: All parties involved should have their names, addresses, job descriptions, duties, and ownership stake listed here.
- Members' contributions: Include any financial or other contributions the members want .
Why Do You Need an LLC Operating Agreement in Alabama?
You need an LLC operating agreement in Alabama to state the business's purpose and show proof of how the entity is managed.
Here are the key reasons why you need an operating agreement for your Alabama limited liability company:
Protection Against State Default Rules
Without an operating agreement, your LLC is subject to the default regulations regulating the operation of LLCs in your state.
Instead of the members of the LLC deciding on important policies and regulations that control the inner workings of your organization, the members will have to investigate and reference the Alabama state default rules each time a dispute develops amongst members.
This procedure is not only wasteful economically, but the default LLC state regulations may also damage the LLC's members' business and interests.
Protection Against Harsh Member Claims
Operating agreements also shield members from one another. While you may not anticipate future arguments with your fellow members, they are certain to arise at some time.
When these differing points of view or ideas occur, it is critical to have a clear and decisive set of written guidelines to address the issues.
Maintaining Business and Personal Identities Separate
For liability purposes, an operating agreement aids in separating the business from the owner.
A key advantage of an LLC is that it restricts liability in both directions, shielding the company's assets from members' personal responsibilities while also protecting members from business liabilities.
The company can appear to be a sole proprietorship without an operating agreement. You can forfeit the liability protection that an LLC provides if a court doesn't view your LLC as a separate legal entity from you.
Clear Equity Structure
An Alabama limited liability company's equity structure comprises donations, capital accounts, and how profits and losses are handled.
Having an operating agreement addresses the membership interests, classes of membership interests, donations, and capital accounts.
Furthermore, your operating agreement also specifies how revenues, losses, and payouts will be distributed among all members.
Defined Management Structure
You have the option of having your LLC handled by members or by management.
If your entity is manager-managed, the limited liability agreement specifically addresses management appointments, voting processes, manager tasks, responsibilities, and how managers can be dismissed if required.
Proof of Ownership
Because it lists the names of all members, your limited liability company agreement serves as evidence of company ownership.
You may use your operating agreement to prove that you own your LLC when you take significant actions because it is a legal document.
For instance, your LLC will have to present a copy of your operating arrangement to open an LLC business bank account or a financing arrangement.
Hence, having one will make opening multiple financial accounts simpler.
To focus on business development prospects as the company grows, you may engage a manager to handle the day-to-day business operations.
A limited liability company agreement might specify the manager's responsibilities, including power, salary, and what happens if they quit or start their own business.
Protection Against Anti-Dilution
An LLC may expand and provide new membership interests to new members.
Your limited liability company agreement offers an anti-dilution language that safeguards certain members with particular stake percentages in terms of voting rights, capital calls, or any other pre-emptive rights to acquire additional classes of membership being offered.
Is an Operating Agreement Required in Alabama?
No, an operating agreement is not required in Alabama. Still, it's important to have one because an LLC’s operating agreement dictates how the entity will conduct business, and it also defines the members' liability protection and ownership interest.
Do I Have to File My Operating Agreement With the Alabama Secretary of State?
No, you do not have to file your operating agreement with the Alabama Secretary of State because it's an internal document that governs the LLC's and its members' activities.
Does My Alabama Operating Agreement Require Notarization?
No, your Alabama operating agreement does not require notarization. The only official assurance is the signatures from each LLC member.
Do You Need Professional Help Drafting Your LLC Operating Agreement?
A formal operating agreement will provide definite guidelines and expectations for the administration and operations of your limited liability company.
If you want to make this process easier, consider employing ZenBusiness to ensure your operating agreement accurately reflects your LLC goals.
ZenBusiness has an affordable operating agreement service in all their comprehensive plans that allows you to set your LLC ground rules, protect your assets, and assign member ownership.
They also offer a customizable template that you can edit to provide an efficient structure and framework for your Alabama business.