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Having an Operating Agreement during the initial phases of the LLC formation process is one way to establish credibility for your business. More importantly, it will regulate the day-to-day operations of your business, define the rights and responsibilities of the members, and offer solutions to future issues, such as management policies and profit distributions. 

Drafting a comprehensive Vermont Operating Agreement will save you from disagreements and headaches down the road. Read this step-by-step guide to learn what this document covers, why you need it for your business, and how to create one.

What is a Vermont LLC Operating Agreement?

To form an LLC in Vermont, you need to file the Articles of Organization with the state. You should also create an Operating Agreement, a binding contract between all members of the LLC. 

Your Vermont LLC Operating Agreement will provide regulations to guide the affairs and operations of the company and rules to manage the working relationship among the members and between members and managers. It will also specify the roles of members and managers within the company. 

When signed by all members, the agreement becomes a legal document and needs to be kept with the company records.

Why do I need an LLC Operating Agreement in Vermont?

Your Operating Agreement will set instructions for the management of the company operations and define the working relationship among the members. So, it makes sense that banking institutions will ask to see it before allowing you to open a business bank account. Investors may also ask to see your Operating Agreement before making any commitments. 

You may also need an Operating Agreement because:

• It protects your company’s limited liability status: An Operating Agreement is the difference between your company and sole proprietorships and partnerships. Business owners must maintain their companies as separate entities at all times, and an Operating Agreement will help establish that distinction. 
• It protects the agreement in the eyes of the state: If you don’t create an Operating Agreement for your Vermont LLC, you will be subject to the default laws of the state. Although these laws are reasonable and you’ll probably include similar provisions in your Operating Agreement, there may be areas where these laws differ from what your LLC members agreed on. So, to take control of the rules and regulations for your company, create an Operating Agreement. 
• It formalizes verbal agreements: If you’re starting a Vermont LLC with friends or relatives, don’t forgo drafting an Operating Agreement. Even if you trust each member to uphold their part without written consent, running a business is a huge responsibility that involves money, clients, and the law. Ensure you have rules and regulations to direct the operations of your company. Clearly defined roles for members and managers can also prevent conflicts later on. 

What do I include in my Vermont LLC Operating Agreement?

You can customize your Operating Agreement to suit your management style and accommodate the needs of your business and your plans for the company. Below are recommendations to ensure you cover all of the necessary points to produce a comprehensive Operating Agreement. 

Items to include in your Vermont Operating Agreement are:

1. Company Information

Start your Vermont Operating Agreement with the same basic information about your company provided in the Articles of Organization.

• LLC name/business name
• The organizational date
• Vermont registered agent and/or registered office
• The purpose of the business
• Names of any members
• Tax classification of the company

2. Ownership

As the sole owner of an LLC, you own 100% of the business. However, if you have co-owners, you’ll have to discuss if you will adopt an equal ownership structure or assign ownership units. Equal ownership means members will own the same percentage of the business without taking capital contributions into account. 

But if you decide to assign the percentage of ownership according to capital contributions, you’ll write down each member’s contribution and the corresponding membership interest in the Operating Agreement. For example, say your LLC has three members, and the company needs initial capital of $15,000. You contribute $7,500, while the other two members contribute $3,750 each. So, you have 50% in the company, and they will each own 25%.

3. Management Structure

An LLC can be member-managed or manager-managed. Your LLC is member-managed if a member will also be the one managing the company. For example, this is the case if you open a cake shop, and you and your partners are also the bakers and storekeepers of the business. On the other hand, a manager-managed LLC appoints a manager to run the business’s day-to-day operations. Owners will only be involved in major business decisions. 

If you have partners in the LLC, you probably discussed this matter already, as you needed to state your preference to file the Articles of Organization with the Vermont Secretary of State. 

In your Vermont Operating Agreement, you can also add guidelines on how or when to change the management structure and provide qualification requirements for a manager.

4. Duties of Members and Managers

Your Operating Agreement should define the roles of the members and managers, especially if your company is manager-managed. There should be a clear description of a manager’s authority and responsibilities. The agreement may mention examples of the type of business decisions members are expected to vote for and take part in. 

From a legal standpoint, a precise presentation of the roles of members and managers in the company is important because it protects everyone in case one person acts in bad faith, steps out of their role, or enters into a fraudulent contract in the name of the company.

5. Voting Rights and Responsibilities

In your Operating Agreement, you’ll have to specify the voting rights and responsibilities of all the members. Your first consideration is to award votes. You can choose to grant each member a vote regardless of their capital contribution or involvement. Or, you can assign votes to each member in proportion to their ownership percentage in the business. 

You can also add who can vote on particular issues and what decisions can be resolved with a majority vote and what needs a unanimous vote from all members.

6. Distribution of Profits and Losses

As an LLC owner, you invest money, property, and services into the company to make a profit. Unfortunately, you’ll share in the losses too, if there are any. You may decide to calculate each member’s share of the profits and losses according to their ownership percentage. Or, you may choose to distribute profits evenly among the members. 

To have all of the information on record, you’ll include each member’s contribution, stake in the company, and share of the profits and losses on your Operating Agreement. You can also state in the Operating Agreement if members can withdraw profits at will from the company or agree to leave a percentage of profits to be rolled over as capital each year.  

You might need to consult with an accountant to discuss your financial situation to develop a profit allocation schedule that will work for you. This is especially important if you are going to leave a significant percentage of your share of the business profits because you’ll have to declare it as income on your tax return. 

7. Taxation

By default, the IRS categorizes a single-member LLC as a sole proprietorship and a multi-member LLC as a partnership. But as a benefit of forming an LLC, you can change your tax classification by electing to be taxed as a C corporation or S corporation. 

However, there’s little advantage to selecting a C corporation status if you are a small business. That’s why most LLCs prefer to change their tax classifications to an S corporation status if they’re eligible. 

An S corporation status is especially beneficial for multi-member, member-managed LLCs because of how it pays self-employment taxes. Sole proprietorships, partnerships, and S corporations are all flow-through entities. This means owners can claim profits and losses, credits, and business deductions on their tax returns directly. But only with an S corporation are LLC owners able to allot a portion of their profits as dividends, and only the amount classified as salary is taxed.

In your Operating Agreement, you should mention the default category of your LLC and indicate if you decided to elect an S corporation or a C corporation status. You may also add guidelines on how and when you’d want to select a different tax classification if you haven’t done it yet.

8. Buyout and Buy-Sell Rules

You need a buyout agreement to protect the company if and when members decide to leave. As each member’s ownership in the company is their personal property, they can sell or transfer their membership to whomever they want, except when the Operating Agreement says otherwise. 

So, if you want to vet new members before joining your LLC, that needs to be written in the Operating Agreement. The same goes for if you decide that members can transfer their ownership interest to relatives. You have to be specific on what a transferee can or can’t do, such as receiving profit shares but not being permitted to vote on business matters.

9. Succession Planning

It’s important that you include provisions in your Operating Agreement that address if a member dies or withdraws from the company. Having guidelines allows for a smoother transition for all parties involved. 

Here are some points to address regarding succession planning in your Vermont Operating Agreement:

• Does a member’s departure or death mean the dissolution of the company?
• Are members allowed to sell or transfer their ownership to third parties (e.g., spouse, relatives, legal representative, other individuals, companies)
• Will current members have the right of refusal before the sale is offered to external buyers?
• How is the price of the membership calculated?

10. Dissolution

Although an LLC is granted perpetual life by state laws, members may decide to discontinue the business. When this happens, the LLC must be dissolved. In the Operating Agreement, you should provide an outline of the steps to end business operations. 

Specify who can call to close the company and if a majority vote is enough to pass the resolution forward, or if it has to be a unanimous decision among the members. 

You could also include tasks such as:

• Filing the final tax return for the business 
• Canceling all licenses issued to the company 
• Closing all bank accounts and credit cards

Filing the Articles of Dissolution with the Secretary of State

11. Meetings

LLCs are not expected to conduct annual meetings and keep detailed records, but to run company operations smoothly, members may want to meet to discuss business matters. 

So, for clarity and easier enforcement, add a clause in the Operating Agreement about company meetings. Mention what events will require a meeting to resolve, how meetings are scheduled, and where they’re held.

12. Single-Member LLCs

Suppose you are the sole owner of an LLC. In that case, even if it might seem that many of the relevant points don’t apply to your company, it’s still advisable that you create an Operating Agreement because it will spell out the implied provisions regarding your ownership of the business. This includes specifying that you have a 100% stake in the company, make all of the business decisions, and have the full authority to enter into contracts with third parties as a representative of the company.

13. Severability Clause

You should close your Vermont LLC Operating Agreement with a standard severability clause. It’s a legal boilerplate used in contracts. It states that even if a portion of the Operating Agreement becomes unenforceable under the law, all the other parts are still in effect. Include this clause to ascertain that small errors or inaccuracies won’t invalidate the whole agreement. 

Updating and Revising Your Vermont LLC Operating Agreement

Whenever you make key changes in membership, such as welcoming a new member or a member leaves, you will need to update your Operating Agreement. You’ll also have to revise it when you accept additional capital contributions, change the allocation of profits, or switch from being a member-managed LLC to a manager-managed structure or vice versa. Any changes in the financial and managerial features of your initial Operating Agreement will require you to amend it. 

As a business registered in Vermont, you are also required to maintain your LLC’s good standing. This means filing an annual report with the Secretary of State and ensuring that the following information is always up to date:

• Your Vermont registered agent’s name and address  
• Your business address and mailing address 
• The names of members and managers

Even if there aren’t any significant changes in your LLC’s financial and managerial structure, you are still encouraged to revisit it once a calendar year to ensure that the guidelines you’ve written are still in line with the needs of your business. 

Suppose you need to make changes to your Operating Agreement. In that case, you may want to consult with professionals familiar with your state’s laws to make sure you include provisions applicable to your business model and industry.

Partner With ZenBusiness for Professional Assistance

Are you eager to get started with running and growing your business, but don’t have time to worry about your Operating Agreement? ZenBusiness can make the process easier and simpler. Utilize our template to help you draft a comprehensive Operating Agreement.

However, as businesses have different needs and organizational structures, it’s highly recommended that you consult a legal professional before signing your Operating Agreement.