Is it Time to Update your LLC's Operating Agreement?

Corey Bray
by Corey Bray 17 Feb, 2017
LLCs were originally formed in Wyoming in 1977 as a way to form companies that could be taxed like a partnership while still gaining liability protections as if it were a corporation. 

When an LLC is created, the typical process involves members drafting rules and regulations on how to manage the company. This is an essential document, and is is known as an LLC Operating Agreement.

LLC Operating Agreements are legal documentation that govern the rights and duties of each and every member, new member indoctrination, decision-making processes, and other aspects involving financial logistics and company management.

As a business grows, various aspects will need to be reviewed and changed as new members are on-boarded, management systems shift, and membership interests fluctuate.

If you think it might be time to update your LLC's Operating Agreement, here are some of the most common scenarios in which revisions become necessary and how to complete the task.

When to Modify an Agreement

There are many factors that could contribute to an LLC amending its initial Operating Agreement. 

One of the most common cases associated with growth is transitioning from a member-managed system to a manager-managed structure.

When LLC's first start out, there is usually only a few members and these business partners typically manage the company as a partnership, holding equal authority to make business decisions. 

As a company expands to encompass more members, it often becomes necessary to divorce management from members and switch over to manager-managed protocol. This means that members, while still having interest in the company, will not dictate the organization's direction.

Another common revision point comes as a result of restructuring how units of membership interest are divided up; these two updates may even happen at the same time.

Units of membership interest are comparable to shares of corporate stock and determine each member's stake in the company. While these may have started as equal, organizational growth causes these to be allocated differently. 
Other situations that require amendment considerations include:

- An influx of capital into the business

- The addition of a clause preventing early member withdrawals

- The addition of a non-compete clause 

- When a member joins or leaves the organization

- Other financial or managerial changes which impact the original document

So how can LLC members actually go about making these types of revisions?

How to Amend Your Operating Agreement

Fortunately, this process is extremely simple and straightforward. Often times, when creating the initial LLC Operating Agreements, the terms of addressing changes are included. 

If your LLC does not have a clause pertaining to this, however, a supermajority of members (at least two-thirds) simply need to approve the changes to be made and document them accordingly. If a majority or unified consensus cannot be reached, amendments will not be validated.

Making matters easier, these changes do not have to be filed with the state, unlike the formation of the company itself. 

Do understand that updating your LLC's Operating Agreement is not a one-time endeavor. This is something that your company will have to continually address as growth persists. Such revisions help the original members to maintain control of the company while keeping internal disagreements on how to manage the business at a minimum. Reviewing and amending this document will also serve small businesses as a way to operate in an efficient manner while maintaining ethical standards. This alone helps your company to continue its prosperity for years to come.

Corey Bray is the CEO and founder of LegalNature. A serial entrepreneur, Corey has successfully exited several startups and is currently focused on revolutionizing the business document industry.