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Entering any business relationship requires agreements. Often, these agreements can be verbal; many times, they are required to be formally acknowledged. Formal written agreements are generated to align with the company’s vision and its mission — providing direction and purpose. One of these written agreements should involve the Kentucky limited liability company (LLC) Operating Agreement — a document frequently put aside because business owners may not understand its importance. 

Find out why your business should have an Operating Agreement, what issues it should address, and why it is vital not to procrastinate in formalizing this document. Discover more about what a Kentucky Operating Agreement is and how you can create one for your company below.

What is a Kentucky LLC Operating Agreement?

An Operating Agreement formalizes business arrangements for a Kentucky LLC, whether it is registered to a single owner or several owners (owners of an LLC are referred to as “members”). A formal agreement addresses how the ownership is structured, operating procedures, and decision-making related to daily operations. 

While Kentucky does not require LLCs to have an Operating Agreement, it’s in the owner’s interest to formalize this agreement in writing. However, you are not required to file your Operating Agreement with the Kentucky Secretary of State. 

Create your formal document and keep it at your official business address for safekeeping. Changes frequently need to be made to this agreement, so it is recommended to keep it nearby for ongoing updates to maintain its validity. No costs are associated with the creation of this agreement since no official filing is needed.

Why do I need an LLC Operating Agreement in Kentucky?

According to the U.S. Small Business Administration (SBA), an Operating Agreement is highly recommended to support business operations. Both functional and financial business aspects are covered in this document to protect owner interests and clarify ongoing procedures. 

Preferably, the Operating Agreement should be drawn up before the LLC is registered or shortly after this process has been finalized. However, an Operating Agreement should be in effect before the company engages in any business dealings. 

As a single-owner LLC or multiple-owner company, essential information must be provided in this important document. Here are several critical reasons why drawing up a Kentucky Operating Agreement is beneficial for your LLC:

• Direction for your vision: Creating an Operating Agreement supports the attainment of the company’s vision. Where the vision is an intangible future projection, the operating agreement is a current tangible document that offers clarity to reach your company goals. 
• Organization structure and ownership: Whether the LLC is singly owned or has multiple owners, several details should be included in the Operating Agreement. All owner names, addresses, and contributions must be documented for the company’s and members’ protection. You’ll want to include details regarding whether the owners will manage the company or whether professional managers will be appointed to run the company. Additionally, ongoing changes should be documented throughout the life of the company. Changes may include different owners, contributions, voting rights, and management of the company. 
• Voting rights: You’ll want to state voting rights and whether they relate to contributions as well as ownership percentages. Not only will these details protect owners’ rights in the LLC, but they will also offer protection in the case of internal conflict or if the company is sued. 
• Clarification of authority: Your Operating Agreement provides clarity related to decision-making. Stipulate decision-making for each LLC owner. When authority is defined, everyone understands what is expected. Recording responsibilities helps avoid internal conflicts related to business operations, so dispute resolution procedures are valuable to the Operating Agreement. Also, penalties can be applied for owners who overstep their authority to ensure everyone remains in line, preventing any owner from placing others at risk of unwanted legal or networking repercussions. 
• Additional personal liability protection: An Operating Agreement further separates LLC assets from personal wealth. If the LLC is sued, your personal wealth is better protected when these details are clearly outlined in the agreement. 
• Avoid state interference: When an Operating Agreement is created, the state will respect its contents if these comply with regulations. Conditions related to dissolution, profit sharing, and liability should be clarified in the agreement. When an Operating Agreement is absent or unclear, state laws will prevail. 
• Flexibility: The Kentucky Operating Agreement is a flexible document, allowing for changes in the management structure and ownership. It enables alterations to authority and reporting when needed.
• Make it clear that you mean business: A formal document speaks volumes in the business world. Banks, lenders, and other third parties recognize the validity of the Operating Agreement, which also affords credibility to the LLC. Loans, investments, and business bank accounts are more easily obtainable when the Operating Agreement has been established.

What do I include in my Kentucky LLC Operating Agreement?

Drawing up an Operating Agreement can be quite daunting. You should refer to the Kentucky Limited Liability Company Act to ensure you cover what is needed in your Operating Agreement.

1. Basic Information

Basic information included in the Operating Agreement must match the details provided in the LLC’s Articles of Organization. Include the registered name of the company, the registered office street and mailing addresses, and whether managers or the members will run the LLC.

2. Declaration of Intent

Write a short intent declaration confirming that the Operating Agreement concurs with Kentucky LLC laws. Add a declaration that the Operating Agreement will be effective once the LLC has been officially filed and registered by Kentucky’s Secretary of State.

3. Reason for Existence

State why the LLC exists, its nature, and the business purpose. Include a statement that allows you to expand business operations, which can read something like, “… the current nature of the business is … which may be expanded to include other business activities within the law.”

4. Duration of Existence

Add a clause that the LLC will remain in operation until the company is deregistered according to state laws or until the LLC is dissolved in terms of the Operating Agreement. This term is especially important when the LLC has been registered for a once-off operation but is equally important to prepare for unforeseen circumstances. 

5. Tax Provisions

You’ll want to clarify how your LLC is taxed — more specifically, as a sole proprietorship, partnership, S corporation, C corporation, or a nonprofit. Additionally, Kentucky LLCs must pay a limited liability entity tax (LLET), so you should include that note, as well. You can learn more about LLC taxation via the Kentucky Department of Revenue.

6. New Member Additions

Describe how new members will be included in the LLC and how their contributions will be governed relative to profit distributions, voting rights, decision-making, and the running of the company.

Whether the LLC is member-managed (managed by the LLC members) or manager-managed (managed by certain appointed members and/or a hired manager) will impact how new members are incorporated into the Operating Agreement. Include a clause for adding new members from the start, even if you ar

7. Maintain Member and Management Records

These details are useful for record-keeping purposes. Maintain a clear record of member and manager names throughout the years to make it easier to pinpoint operational or legal problems during the life span of the LLC.

8. Capital Contributions

Keep a strict record of all capital contributions by owners. For multi-member LLCs, you need to include the names and contact information of all members and their percentages of ownership.

Some businesses split ownership equally among all members, but some may choose to do it differently to account for differences in capital contributions or time and effort contributed. Just make sure that however you split it up, the total percentage equals 100%.

9. Distribution of Profits

As your business earns money, you will need to determine how profits are divided among members. Is it based on ownership percentage? Also, how often will this distribution happen? Will members be paid by check or direct deposit? Who is responsible for enacting these payments?

10. Voting and Meetings

Draw up rules to govern meetings and voting. It’s important to hold regular meetings and maintain records of agendas and decisions made, even if it’s not legally required. Specify owner voting rights, percentages, approval numbers for changes to be made, criteria for unanimous voting, and who has the final decision in the case of a stalemate.

Also, clarify how much voting power each member has and how it’s determined. Include descriptions of how many owners should be present to validate a vote and if votes are invalidated due to a lack of attendance at a quorum.

11. Management Structure

State whether the members will run the company or if managers will be hired or appointed from the LLC membership. Determine manager salaries, increases and bonuses, how they will be appointed, terms of service, and decision-making restrictions. Decision-making restrictions can be decided at meetings based on quorum votes.

12. Member Responsibilities and Compensation

Outline member duties and responsibilities to the LLC and each other. Each member’s role in the LLC should be clearly described to avoid conflict, in addition to limitations on their authority. Include a description of how members will be compensated if they will manage the company, in addition to their profit-earning interests.

13. Rules Governing Member Admittance, Termination, and Interest Transferal

Address how new members will be accepted into the LLC. Create rules for this process with how their termination of ownership will be managed — whether voluntarily or through unacceptable behavior that negatively impacts business operations.

Once a member has departed, processes need to be established to address how their interests will be transferred to other members in terms of percentages, voting rights, authority, and so on. These processes should also address the buyout/distribution of the member’s capital contributions. Who will have the first rights to purchase their interests, and at what price? What other factors need to be covered in this section?

14. Rules Governing the Dissolution of the LLC

Think about what will happen if the LLC must be closed completely. Create a process to manage this situation from a legal standpoint and an ethical perspective. Legal and taxation requirements must be met, as must fairness to all members, in this event.

Access Expert Help to Create an Operating Agreement

Creating a comprehensive Operating Agreement for your Kentucky LLC can be exhausting and time-consuming. It can also be highly rewarding once you have addressed the issues above and others to support your company’s vision.

After completing the first draft, get legal advice. Your peace of mind and business health depends on creating an inclusive document to support ongoing business operations. 

ZenBusiness is available to support your goals with our Operating Agreement template. We also offer additional services, such as connecting you to a registered agent, acquiring an EIN, and helping your business stay compliant with the Kentucky government. Even with our template, we recommend you consult a legal professional to check that your Operating Agreement passes muster.