If you have decided to set up an LLC in Arkansas, one of the first steps you must take is to draft a comprehensive operating agreement.
To help you understand what you should include in your operating agreement, we sought expert advice from our team of certified LLC lawyers with over sixteen years of experience.
We spent three weeks reviewing the different components that make up a comprehensive operating agreement and compiled this detailed summary of everything you should include in your Arkansas LLC operating agreement.
- An operating agreement is a legally binding contract between limited liability company members.
- An LLC operating agreement describes the details of each LLC member, management structure, voting rights, and ownership stakes.
- An operating agreement separates an entity from its members, thus reinforcing personal liability.
What Is an Arkansas LLC Operating Agreement?
An Arkansas LLC operating agreement is a legal document describing the ownership structure and operational policies of an LLC.
Your multi-member or single-member LLC operating agreement has to include details of members, management structure, capital contributions, and ownership percentage stakes.
Including these clauses is necessary for legal formality, even if they won't significantly affect how your single-member LLC operates.
An LLC operating agreement offers legal and financial redress and guidance if disagreements develop between LLC owners.
The operating agreement's precise text also specifies how the company is set up, how operations will work, and other details.
How to Write an Arkansas Operating Agreement?
To write an Arkansas operating agreement, you must include all essential business components in the respective paragraphs of the agreement.
Alternatively, you can hire an expert to draft the LLC operating agreement and pay a filing fee.
Here are the steps to follow and what to include when drafting an Arkansas LLC operating agreement template.
1. Business Details
The first step is to outline the fundamental facts about your LLC in an operating agreement.
In the business details section, you should include the following:
- Name of the LLC: Your LLC name must conform with the Arkansas LLC naming criteria and include the terms "Limited Liability Company" or the abbreviation "LLC" or "L.L.C."
- Principal Office Address: This is the address where the principal business of your LLC shall be transacted.
- Purpose of the LLC: In this area, outline the main goals and types of commercial operations your LLC will pursue.
- Registration Agent Details: A person or organization named as your Arkansas LLC's registered agent will receive legal papers on the company's behalf. The agent needs a real Arkansas street address.
2. Member Details
This section deals with listing every LLC member and their respective ownership stakes.
It contains information on each member's contributions, such as names and addresses.
This section also includes information on membership growth and decline.
- Original members: Each member's name, address, and ownership stake should be stated along with them.
- Ownership interests: The proportion of ownership held by each member should be specified in this section.
- Capital contributions: The initial contribution made by the sole member of a single-member entity or by each member of a multi-member LLC are recorded here.
3. Management Structure
Which management structure you want to use must be stated in your Arkansas LLC articles of organization and operating agreement.
In a member-managed LLC, the owners/members are in charge of managing day-to-day business operations.
In an LLC managed by a manager, the owners delegate day-to-day activities to the manager.
4. Distribution of Profits and Losses
This section outlines the allocation of LLC earnings and losses among the members. It may be determined by the members' specified alternative agreement or the ownership percentages.
This section of the internal document outlines the distribution procedure and any limitations imposed on such distributions.
- Profit and loss distribution: The legal document should specify how earnings and losses will be distributed among the members, usually under their interests.
- Payouts to members: The procedure for allocating earnings to members, including the date and mode of payouts, should be described.
5. Terms for Joining or Leaving the LLC
As your entity expands, new members can join, or old members can exit. Outline the requirements for including a new member, such as the amount of capital investment necessary and who will vote to approve them.
Include specifics on what will happen when a member leaves, including what happens to their ownership stake.
"An operating agreement can provide that the remaining shareholders get the first opportunity to purchase the retiring member's stock in the company."
- Evan Farr, LLC Attorney
6. Meetings and Voting Procedures
The guidelines for holding meetings and voting are described in this paragraph. It details the quorum needed to make decisions, how votes are tallied, and how members are informed of meetings.
Additionally, it contains details on extra meetings and urgent judgments.
- Voting rights and decision-making procedures: The contract should specify how each management or member will vote and decide about various company topics.
- Meetings and schedule requirements: The operating agreement should outline how often meetings will occur, how to arrange extraordinary meetings, and how much notice is needed for each meeting.
7. Financial Reporting and Recordkeeping
Your Arkansas LLC's operating agreement should specify its accounting procedures and recordkeeping obligations.
Your company's success depends on efficient financial management; hence, you should create a trustworthy accounting system to keep track of your earnings, spending, and tax liabilities.
You should also specify how you'll regard your LLC's fiscal year, which can be a calendar year or any other 12-month term.
Your LLC's tax status and any necessary filings with the Arkansas tax authorities should be included in the agreement.
Include any necessary filing costs for the Arkansas Certificate of Organization, yearly fees, and related expenses.
8. Dissolution Terms
The LLC must be disbanded if its shareholders decide to cease to conduct business.
Include a description of the official company closing procedures in your own Arkansas operating agreement. This might entail paying your final Arkansas LLC taxes and filing the state with the required Articles of Dissolution .
Also, include the conditions that must be met for LLC dissolution in Arkansas.
These may include:
- The LLC members' unanimity in favor of ending the company.
- A sole member dies, the director leaves his/her position or withdraws from the group unless the other LLC members agree to carry on the enterprise.
- When, in accordance with the terms of the operating agreement, a defined time frame or objective has passed.
- A court ruling ordering the LLC to be dissolved.
Why Do You Need an LLC Operating Agreement in Arkansas?
You need an LLC operating agreement in Arkansas to legitimize your entity, enjoy personal liability insurance, formalize verbal agreements, and avoid state default rules.
Here's a detailed rundown of the benefits of an Arkansas LLC operating agreement:
More Corporate Freedom
Undoubtedly, the most adaptable legal company formation you can create is an LLC. Less strict rules apply to its management, reporting, and taxes than they would, for instance, to a corporation.
The operating agreement is the key to this adaptability since it enables you to specify everything from members' voting rights to what happens when a member wishes to leave the LLC to the measures that must be taken to dissolve the LLC.
Reinforces Company Legitimacy
An operating agreement lends validity to the company, demonstrating to outside parties that your firm is being run ethically.
Before opening an LLC business bank account for you, banks and other financial institutions will, for instance, need to see a copy of the operating agreement.
If you are searching for funding from private sources, a reputable angel lender will also ask to see an operating agreement before committing to your business.
Liability Protection Benefits
An operating agreement separates the members (owners) of an LLC from the corporate body.
The operating agreement also separates the members' liabilities from the LLC's obligation if the company encounters legal issues, such as a lawsuit.
If the company or entity is sued, your assets as a shareholder, such as equipment and money, are protected.
Prevent State Rules Interference
Arkansas's default rules will be used if your LLC does not have an operating agreement. An operating agreement safeguards you and keeps the government out of your company.
Consider how the earnings are divided. For example, the Arkansas state law may require that LLC earnings be distributed equally among the LLC's owners upon LLC dissolution.
However, you can define how earnings are distributed in an operating agreement in relation to the ownership stakes of each owner.
Is an LLC Operating Agreement Required in Arkansas?
No, an LLC operating agreement is not required in Arkansas, but you should have one to manage how your entity will operate.
Who Prepares an LLC Operating Agreement in Arkansas?
Owners or members prepare an LLC operating agreement in Arkansas. Alternatively, you can seek expert help from an attorney or a professional LLC service to create your own LLC operating agreement.
Are Operating Agreements Filed With the Arkansas Secretary of State?
No, operating agreements are not filed with the Arkansas Secretary of State. An operating agreement is an internal document that governs the management responsibilities, capital contribution, personal assets, and profit distribution of all the members.
Do You Need Professional Help Drafting Your Arkansas LLC Operating Agreement?
When creating your Arkansas LLC operating agreement, you must follow all the guidelines because any overlooked information or omission may subsequently cause legal issues.
Thankfully, you can enlist ZenBusiness operating agreement service for your LLC.
With ZenBusiness, you'll get an affordable, customizable LLC operating agreement template, access to a business address, a registered agent, and instant document delivery.
You'll also have structure-specific operating agreements for your single or multi-member Arkansas LLC.