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When you start a business, you’re probably preoccupied with details like choosing the perfect name for your limited liability company (LLC) and appointing a registered agent. Creating an Operating Agreement may not be at the top of your to-do list — but it should be! 

This essential piece of paperwork specifies how your business will be run and by whom. Setting out these details before you commence day-to-day operations ensures that every person involved in the business is clear on their duties, rights, and responsibilities. 

Even if you are a one-person business, an Operating Agreement is important, as it provides clarity on liability issues and legitimizes your enterprise.

A detailed Iowa Operating Agreement will protect your business and bring you peace of mind. This guide takes you through crafting your Operating Agreement, explaining the document’s significance and outlining what points you may want to include.

What is an Iowa LLC Operating Agreement?

To form an LLC in Iowa, you must submit a Certificate of Organization with the Secretary of State. This paperwork formally establishes your business as a legally recognized entity in the state of Iowa and includes details like the business name and registered agent. Note that Iowa does not provide a Certificate of Organization form or application; it’s up to you to draft it.

You are not legally required to submit a copy of your Operating Agreement with your Certificate of Organization. In fact, Iowa doesn’t require an Operating Agreement at all. However, it’s highly recommended to create an Iowa LLC Operating Agreement, even though it’s not obligatory. 

This document specifies who owns your business and membership interest for LLC members. It further lays out how the business will be governed, for example, who votes on important decisions like new members or a merger, and even plans for possible future events like the business’s dissolution.

State law recognizes Iowa LLC Operating Agreements as a legal document. More specifically, LLC company formation in Iowa is governed by Chapter 489 of the Revised Uniform Limited Liability Company Act. Code Section 489.110 of the Iowa statutes stipulates what points this document may govern, including membership, ownership, the rights and duties of members, and more.

Why do I need an LLC Operating Agreement in Iowa?

According to the U.S. Small Business Administration (SBA), an Operating Agreement is a “key document” for any LLC. It’s essentially an internal guidebook for your business, laying out the rules and regulations to govern everyday financial and functional choices. It’s best to have an Operating Agreement before your business even opens its doors. 

Although you aren’t required to have an LLC to start an Iowa LLC, an Operating Agreement is still advisable, whether it’s a single-person business or a partnership of multiple persons. The document doesn’t just provide clarity on how the business is run. It also offers practical benefits that protect the business and its members (owners). 

These are some of the advantages of an Iowa LLC Operating Agreement:

• Makes verbal agreements easier to uphold: Technically, oral agreements are binding in Iowa. The state’s courts have even ruled in favor of verbal agreements in the past. That said, it’s difficult to prove the contents of an oral agreement and uphold it. It’s one person’s word against another’s. To avoid confusion and streamline the resolution of potential disagreements, it’s best to get any verbal agreement between yourself and your LLC partners in writing.
• Helps protect you from personal liability: Even if you’re forming an LLC solo, an Operating Agreement is valuable. This document lends credence to your business as a legal entity, separating you from that entity by designating you as a member. This differentiation between business versus member is a big deal if liability issues arise. For example, if someone gets hurt using your goods and services, they may sue the business. The Operating Agreement helps distinguish you from the business, so your personal assets, like property, are unlikely to be touched in such a lawsuit.
• Adds credibility to your business: Whether you’re running the show solo or partnering with others for your LLC, you want to create a business that’s seen as legitimate. An Operating Agreement adds credibility. Reputational advantages aside, this document also proves to third parties that you are running your business in an organized manner. For example, private investors will ask to review an Operating Agreement before putting their money into your business, and banks will ask to see this document if you want to open a business bank account.
• Safeguards against state interference: If you don’t create an Operating Agreement specifying how your LLC should be managed, Iowa state laws will automatically take effect. Say a member plans to leave the LLC and wants to sell their portion of the business. The law may state that the member can sell their ownership portion to anyone they wish. However, with an Operating Agreement, you can specify that they must divide their membership percentage among the remaining members. This prevents a departing member from selling out and leaving existing members with undesirable partners.
• Makes the most of the flexibility an LLC provides: One of the biggest advantages of an LLC is its simplicity. Reporting and tax requirements are far easier than those demanded of a corporation, for example. An LLC is subject to less rigid regulations and enjoys greater flexibility. An Operating Agreement is the key to taking advantage of this flexibility, giving you the power to determine essential details from how the LLC is managed to buyout rules.

What do I include in my Iowa LLC Operating Agreement?

Before getting into the details of what to include in your Iowa LLC Operating Agreement, it’s important to note that every Operating Agreement will be unique. Your business is different from anyone else’s, and your Operating Agreement must address the specifics of your business type. 

Still, there are a few basic points that you can expect to include as you draft your Iowa Operating Agreement, including:

1. LLC Name

You have to make it clear what business the Operating Agreement applies to. Specify the name of the company as it appears on the Certificate of Organization that you file with the Iowa Secretary of State. This is how the business entity is legally recognized. 

Use the full business name, in accordance with the state’s laws on naming an LLC. Don’t use an abbreviation, and be sure to include whatever version of “Limited Liability Company” you’ve opted for (as required by the state). 

2. Ownership

LLC owners are commonly referred to as members. The Operating Agreement should include specificities of ownership, also referred to as membership. Different members may have different degrees of ownership, represented by percentage stakes in the company. 

Most businesses opt to have membership reflect an individual’s capital investment into the business. Capital is the money needed to get the business off the ground. So, if two members each put in $500, each will own 50% of the business.

3. Management Structure

Iowa requires you to declare whether your LLC is member-managed or manager-managed when you file your Certificate of Organization. In a member-managed model, the owners are directly involved in daily business operations. This works well for smaller LLCs. 

In a manager-managed model, the members appoint or hire one or more managers to handle the daily operations of the company. The managers can be members or someone from outside the LLC ownership. This alternative may be preferable for larger LLCs with multiple members who can’t be involved in day-to-day operations.

Your LLC Operating Agreement should outline the management model for the company.

4. Duties of Members and Managers

If you have opted for a manager-managed LLC, the Operating Agreement should specify the manager’s precise duties and responsibilities. What actions are they permitted to take independently versus when they need to consult members on business decisions? 

The Operating Agreement should also outline the obligations of members. Even though they aren’t involved in day-to-day operations, they will have duties like taking part in regular meetings to review the Operating Agreement.

5. Voting Rights and Responsibilities

One obligation that members will likely have is voting. What decisions require a member to vote? Does a vote need a majority to win, or does it need to be unanimous? Is voting power distributed equally among members? 

Sometimes an LLC will divide voting power up according to ownership. So, a member who owns three-quarters of the LLC will have three votes compared to one vote of a member who owns one-quarter of the LLC.

6. Distributions

Distributions define how profits are split among members. Some LLCs divide profits evenly, while others divide them according to membership (ownership percentage). The Operating Agreement should also detail when profits are distributed, such as at the end of the fiscal year.

Profit distribution can lead to quarrels, so it’s important to be clear on this point in the Operating Agreement. All members should agree on distributions before entering into a business agreement.

7. Holding Meetings

An Operating Agreement should also outline when to hold meetings so members and managers can come together to discuss the latest business news. It’s an opportunity to touch base and take care of important business, like needed votes or an annual review of the Operating Agreement. 

Make meetings obligatory by including them as a requirement in the Operating Agreement. This is especially useful for manager-managed LLCs, as it encourages members who aren’t normally involved in day-to-day operations to stay engaged.

8. Buyout and Buy-Sell Rules

Your LLC will ideally grow with time. You may bring new members on board to support this expansion. Be clear on what is required to become a member. Do existing members need to vote unanimously on an addition? How much capital does a new member need to put in? 

You may also see members leave your LLC, for example, to start businesses of their own. The Operating Agreement should also cover this possibility by specifying what may happen to their percentage ownership when they leave.

9. Succession Planning

When an LLC member dies or retires, their percentage ownership must be transferred. The Operating Agreement should specify whether they are permitted to leave it to family or friends or whether their portion of the business needs to be transferred to existing members.

10. Dissolution

Dissolution refers to the actual ending of an LLC — it’s breaking up. This can only be done once the business has wound down its existing obligations, like a final tax return. The Operating Agreement should detail the steps needed to reach this point. A major decision like dissolution will likely require a member vote, for example.

11. Modifications to the Operating Agreement

Operating Agreements are not set in stone. You can modify this document as needed. For example, if a new member joins, the Operating Agreement will have to be updated to reflect this change in membership. The Operating Agreement should include the steps needed to modify the document itself. Specify who needs to vote and sign off on amendments.

12. Single-Member LLC Statute

A single-member LLC has just one person who has 100% ownership of the business. It might seem like some of the points above (such as the details about voting in a multi-member LLC) are irrelevant in this case.

However, to help protect yourself legally, you should include a single-member LLC statute. This specifies that you are the exclusive owner and have full authority to make all of the LLC business decisions without consulting anyone else.

13. Severability Provision

A severability provision is a clause commonly seen in all types of contracts. It specifies that if one part of the contract is invalid, it doesn’t invalidate the entire agreement. The Operating Agreement thus won’t be meaningless because of a single mistake.

Updating and Revising Your Iowa LLC Operating Agreement

As mentioned, one of the greatest advantages of LLCs is their flexibility — and the key to tapping into this flexibility lies in the Operating Agreement. It should thus come as no surprise that Operating Agreements are living documents that can be amended and updated according to your business needs. 

Not only can you make revisions to your Iowa LLC Operating Agreement, but it’s wise to also revisit this document at least once per year to check that it’s still in line with your current operational needs.

Members and managers should meet annually to review the Operating Agreement. If any changes have been made to any of the operational or financial points laid out in the initial Operating Agreement, these need to be revised accordingly. 

In addition to making changes based on an annual review of the document, amendments should be made immediately in case of significant changes to the LLC’s membership, management, or operational guidance.

If you determine at any point that amendments are needed, follow these steps:

1. Check your existing Operating Agreement. It should include guidelines on how to change the document itself. The odds are that a certain percentage of members need to approve amendments, for example. 
2. Make the needed changes in writing. Don’t rely on verbal agreements, which are more difficult to uphold in the court of law.
3. Have the members sign off on these changes. If the updates impact others involved in the business, such as managers, they must be aware of the updates.

Finally, check whether any amendments you’ve made need to be communicated to the Iowa Secretary of State. Details included in the Certificate of Organization likely need to be updated on the state record — like the business’s address or a change in management structure from a member-managed to a manager-managed LLC. 

To update such information, you must file an Amendment or Restatement of Certificate of Organization with the Secretary of State. You will also have to pay a $50 filing fee.

Partner With ZenBusiness for Professional Assistance

When you go through the many points that your Operating Agreement should include, you may feel overwhelmed. ZenBusiness resources can help you get things under control. Our customizable template provides a baseline for your Operating Agreement creation. An attorney can then provide input on specifics needed for your state and business.