Hawaii LLC Operating Agreement + Free Template

Atty. Danya Shakfeh
Published by Atty. Danya Shakfeh | Author
Last updated: February 13, 2024
FACT CHECKED by Lou Viveros, Growth & Transition Advisor
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An operating agreement is one of the crucial formation documents your Hawaii LLC must have.

To help you take the right steps in drafting your operating agreement, we teamed up with our certified business advisors and lawyers with over twelve years of experience in the LLC field.

We spent the past five weeks reviewing different official Hawaii operating agreement templates.

Here's everything you should know about the components of a Hawaii LLC operating agreement and how to write it.

You can also opt for legal assistance from Hawaii LLC service professionals, who are adept at drafting operating agreements with all essential clauses.

Quick Summary

  • In Hawaii, having a written operating agreement is not required by law for LLCs, but it is highly recommended for efficient business operations.
  • A Hawaii LLC operating agreement is an internal document outlining operational guidelines, ensuring smooth business operations, defining member roles, and maintaining legal separation between business and personal assets.
  • According to the 2023 U.S. Small Business Profile, 133,993 small businesses constitute 99.2% of Hawaii's business population, highlighting the importance of tailored operating agreements for these entities.
  • In the Donnelly v Jewel of Kahana LLC case, the LLC operating agreement's clear valuation process for disassociating members' interests led to efficient dispute resolution and resource preservation, showcasing its pivotal role, in my view.


Hawaii Operating Agreement Free Template

Writing signature on LLC operating agreement in Hawaii

Disclaimer: This template is offered for informational purposes only and is not intended as legal counsel. It is advised to consult a qualified attorney to verify its appropriateness and accuracy for your specific circumstances. We bear no responsibility for the utilization of this template.

Before downloading our template, we recommend reading our comprehensive article that elucidates the key differences between member-managed and manager-managed LLCs.

What Is a Hawaii LLC Operating Agreement?

A Hawaii LLC operating agreement is an internal file that outlines the rules or guidelines for how the LLC should operate.

A written operating agreement acts as an operational handbook containing information on the LLC, all the members, and their roles in the business.

The procedures for handling earnings and losses, member compensation, and other matters are also outlined in this publication.

A customized operating agreement is not required by Hawaii law for LLCs. But you'll need one if you want to make it simple for you and your fellow members to conduct business together.

After being signed by the sole owner of a single-member LLC or by each member of a multi-member LLC, the operating agreement is legally enforceable.

This contract will ensure that everyone abides by the regulations that you have all agreed upon.

"LLC operating agreements allow members to customize their interactions with each other according to the needs of the organization."
Jon Morgan, Co-Editor & Co-Founder of Venture Smarter

Writing Operating Agreement Do's and Don'ts

Providing information about LLC

Do's:

  1. Incorporate Flexibility for Future Changes: Ensure your operating agreement has provisions that allow for adaptability as your business evolves. This includes accommodating changes in management structure, member roles, and business objectives.
  2. Plan for Technology Integration: As businesses increasingly rely on digital tools and platforms, include guidelines on how technology will be used and managed within the LLC.
  3. Ensure Clarity and Comprehensiveness: The agreement should be clear and detailed to avoid misunderstandings or disputes.
  4. Understand Hawaii's Specific Requirements: Familiarize yourself with any state-specific requirements for operating agreements in Hawaii.

Don'ts:

  1. Avoid Over-Reliance on Basic Templates: While templates can be a starting point, ensure your agreement is customized to fit the unique aspects of your business and complies with Hawaii's specific legal requirements.
  2. Don’t Underestimate the Importance of Regular Updates: Regularly review and update your operating agreement to reflect changes in the business environment, member dynamics, and legal requirements.
  3. Avoid Ambiguity in Member Contributions: Be specific about non-monetary contributions such as time, expertise, and resources. Clearly define their value and how they impact profit sharing and decision-making.
  4. Avoid Neglecting Exit Strategies for Members: Detail the process for a member’s exit due to retirement, a decision to sell, or unforeseen circumstances, including how their stake is valued and transferred.

What Should Be Covered in My Operating Agreement?

Your operating agreement for an LLC in Hawaii should detail essential components such as the official LLC name, ownership percentages, and procedures for decision-making, in compliance with Hawaii's state regulations and tax requirements.

Here is a list of the elements that should be covered in a functional operating agreement in detail.

1. LLC Name

Writing details about LLC meembership

The first step in drafting an operating agreement is providing key information identifying your domestic or foreign limited liability company.

The information provided must match what was stated in the Articles of Incorporation you filed with the Hawaii Department of Consumer Affairs.

It would be best if you incorporated the following:

Remember to provide the correct and updated information about your registered agent as they receive legal paperwork relevant to your Hawaii limited liability company on your behalf.

2. Ownership Details

Declaring the management structure of LCL

You must then provide information on the ownership details of your Hawaii LLC.

This entails providing details on its current members, their obligations, rights, contributions, and ownership stakes. Additionally, instructions for membership modifications should be supplied.

The obligations and responsibilities that each member of your Hawaii LLC has must be specifically laid out in your operating agreement.

Your own operating agreement must specifically include the following information:

  • Initial LLC members' names and addresses
  • The capital contributions of your members
  • Percentages of ownership for your members
  • Rules to follow while bringing on new members
  • Instructions for the transfer of membership interest

Doing this may prevent management misconceptions and conflicts that could develop if certain team members overstep their authority-related bounds.

3. Voting Rights and Decision-Making Powers

Assigning membership obligation and roles on a document

This section should specify the voting power of each member. The voting provisions outline if decisions are made through a democratic process, where major resolutions require a supermajority vote or if decisions are settled by a simple majority.

This framework ensures fairness and efficiency in decision-making, reflecting each member's vested interest in the LLC.

4. Profit Distributions

Your LLC's management of income and losses incurred during operations must also be spelled out in detail in your operating agreement. 

These instructions must provide information on how revenues will be distributed to members.

Indicate the distribution percentages and the timing and methods of profit distribution. Also, other necessary aspects to include are the specifics on how losses are allocated among members.

5. Management

Clapping in the middle of a team meeting

You need to specify your LLC's management structure.

This is crucial since the amount of active participation in your organization among your membership is influenced by your management structure.

There are only two structures, and each has a unique trait:

  • Member-managed: In this structure, members of member-managed LLCs are actively involved in managing and carrying out daily activities.
  • Manager-managed: In manager-managed LLCs, a manager chosen by the membership is responsible for the limited liability company's business operations. In this arrangement, members play a more passive role, and the management provides feedback or reports on the company's operations and success.

6. Record-Keeping

Writing rules for financial reporting and recordkeeping

When it comes to money, your business must be open and reliable. Your operating agreement must have provisions for recording financial transactions and disclosing your financial position to achieve this.

The following must be present in this section of the operating agreement:

  • Information about your bookkeeping and record-keeping: Describe how your accounting system operates in your operating agreement. This technique monitors financial transactions on the business bank account, receipts, outlays, and tax liabilities.
  • The fiscal year of your business: It can be a 12-month period starting at any moment throughout the year, or it could be a calendar year.
  • Tax classification and filing requirements for your business: Declare in your operating agreement the tax treatment your LLC has chosen, whether the default LLC status or S or C Corp. Additionally, be aware of state-specific tax obligations, such as Hawaii's requirement for businesses to address a variable general excise tax (GET) and obtain a General Excise Tax License for a fee of $20, ensuring comprehensive tax compliance [1].

7. Member Change Process

Passing dissolution terms on a document

This section of the agreement outlines a clear procedure for both existing members who wish to resign and prospective members seeking to join the Hawaii LLC.

It provides a structured and transparent method for handling both entry and exit scenarios within the company.

Lastly, you must set the specific procedures for handling LLC dissolution in your operating agreement.

The factors that may cause an LLC to dissolve include a member's resignation or early departure or a court ruling requiring the dissolution of your LLC if a case is lost.

You must include the procedures to be followed when dissolution occurs, such as paying company debt, splitting the remaining assets, and filing dissolution papers with the Secretary of State [2].

8. Meeting Requirements

The members of your LLC may meet regularly to report on the operation of the LLC and to discuss problems as they arise.

Your operating agreement must specify the procedures for these meetings, regardless of their intended goals.

Your operating agreement must specifically include the following topics:

  • The procedure for planning, arranging, and holding meetings
  • The method or procedures for alerting all participants of planned meetings
  • Rules for postponing meetings if certain members are unable to attend
  • Information describing each member's right to participate in the company's decision-making processes

9. Operational Rules and Regulations

Writing an operating agreement for an LLC

The operational rules and regulations should encompass a comprehensive framework for the LLC's daily functioning.

This includes specific protocols for internal management, administrative duties, and the delegation of responsibilities. It's essential to detail the procedures for financial management, including budget approvals and expense tracking.

The agreement should also address communication protocols, meeting schedules, and reporting requirements. These rules are designed to ensure smooth, efficient, and transparent operations, fostering a well-organized and collaborative working environment within the LLC.

Do I really need an LLC operating agreement in Hawaii?

Shaking hands for an agreement

No, it's not mandatory; however, there are several advantages to considering an LLC operating agreement in Hawaii, such as maintaining limited liability status and offering business clarity.

This is in addition to the foundational step of registering your LLC in Hawaii, which involves submitting the Articles of Organization and paying a $50 filing fee, as noted in the Department of Commerce and Consumer Affairs [3].

In the Hawaiian Islands, according to the 2023 U.S. Small Business Profile, 133,993 small businesses make up 99.2% of the state's entire business population, underscoring the critical role these documents play in supporting the structure and clarity of the vast majority of businesses [3].

Let's look at the importance of an operating agreement in detail.

  • It Offers Clarity: Operating agreements clarify how jobs are assigned to members or managers and provide precise guidelines on how things should be done inside your firm. It also clarifies the voting rights of each member and how electoral processes will be handled.
  • It Helps With Conflict Resolution: Because an operating agreement clarifies different aspects of the business, your LLC can avoid any problems that can crop up throughout operations, including managing earnings and losses. And if certain issues arise, the guidelines will assist you in resolving them.
  • It Guarantees Accountability: An operating agreement acts as a formal collection of business rules and regulations that have been considered and approved by the members of your LLC. It is applied to ensure that everyone in the firm is held accountable. Once signed, this instrument becomes legally enforceable, and all parties involved must adhere to its terms.

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FAQs

Can I Amend My LLC Operating Agreement in Hawaii?

Yes, you can amend your LLC operating agreement in Hawaii. Any amendments must be reviewed, approved, and signed by all the LLC members.

Does the Operating Agreement Need to Be Notarized in Hawaii?

Notarization isn't required for legal validity, but it can help to prove the document's existence on a specific date.

References

  1. https://tax.hawaii.gov/geninfo/get/
  2. https://cca.hawaii.gov/breg/files/2014/12/DC-13.pdf
  3. https://advocacy.sba.gov/wp-content/uploads/2023/11/2023-Small-Business-Economic-Profile-HI.pdf

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