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If you’re creating a new company in the state of Alabama, you might have some questions about all of the paperwork you’re required to file. If you’ve never started an Alabama limited liability company (LLC), you might feel overwhelmed by the business formation process.

One important step that anyone forming an LLC in Alabama should take is creating an Operating Agreement. Your LLC’s Operating Agreement will serve as a guidebook for your company and is an important step in ensuring all processes and financial arrangements are thoroughly documented. 

Drafting an Operating Agreement for your Alabama business isn’t hard — especially if you team up with the right business formation company. In this guide, we’ll walk you through all the steps of setting up an Operating Agreement while answering some questions that new businesses often have about this process.

What is an Alabama Operating Agreement?

Every LLC in Alabama should have an Operating Agreement. This is especially important if you form an LLC with one or more other owners (called “members”). Some LLCs in Alabama operate based on verbal member agreements, but it’s critical to protect your company by ensuring all agreements are put into writing.

Not only will your Alabama Operating Agreement help provide additional protection for you and the other members from personal liabilities and financial conflicts, but it also includes the basic principles on the affairs of the company.

Once you’ve drafted an Operating Agreement, all of the Alabama LLC members should read and sign it.

Why do I need an LLC Operating Agreement in Alabama?

In Alabama, LLCs are not required to draft and file Operating Agreements with the Secretary of State. However, this step should not be skipped if you want to protect your business and the members fully.

Here are some of the top reasons why you should create an Operating Agreement during the LLC formation process:

• To protect your company: If you or one of the other members were unable to run your LLC, your company would be run based on Alabama governing laws, which might not fit your specific business model. If you have an Operating Agreement, you can dictate how your LLC should be handled. 
• To ensure your LLC status: When you form an LLC in Alabama, all owners receive limited liability protections. Having an Operating Agreement can help verify this status should any legal issues arise.
• To resolve conflicts: Any time a business has multiple owners, you can expect there to be disagreements. To help avoid and resolve conflicts more easily, you can create processes, rules, and requirements regarding members’ rights and limitations and detail them in your Operating Agreement.
• To allow your LLC’s flexible management style: LLCs in Alabama have much more flexibility in managing their business than corporations. You can help protect this freedom with an Operating Agreement that details your management structure.
• To open business financial accounts: Many times, to obtain a business bank account or financing agreement, your LLC will need to provide a copy of your Operating Agreement. Having one handy will make it easier to establish financial accounts.

In addition, an Operating Agreement can lend credibility to your Alabama LLC by showing investors and future business partners that your company has taken the professional steps to help protect members, legitimize structure, and grow the business in the future.

What do I include in my Alabama LLC Operating Agreement?

There are 11 main sections you may want to include in your Alabama Operating Agreement, specifically:

1. LLC Name

Even though you’ve likely already filed your Certificate of Formation (often called Articles of Organization in other states) with the Alabama Secretary of State under your official LLC name, it’s important to include this name in your Operating Agreement. You’ll also want to include any trade names or trademarks for your LLC. This section is particularly important when opening financial accounts.

2. Ownership Details

In this section, you’ll want to explain how your LLC is owned and managed. If you have other members, it’s important to explain if the members manage the business or if managers (either appointed members or people hired from outside the LLC membership) handle the management of the day-to-day operations. These are called member-managed and manager-managed models.

If you have a sole-member LLC, it’s still important to clarify that you are the owner and the manager. You own 100% of the business and will make all of the decisions regarding your company.

3. Member Rights and Responsibilities

If you have other members, you’ll want to outline everyone’s specific roles, contributions, and responsibilities within the company. Putting this into writing can help settle disputes in the future.

You’ll want to include the names of all of the LLC’s members, list their initial financial contributions to the company, and detail their profit percentages. 

You should also decide how decisions about your Alabama LLC will be made. It’s important to figure out which decisions can be made by managers and which will require a member vote, so both parties have clear expectations.

Next, you’ll want to decide if any or all members have the power to speak for the LLC and make decisions outside of the group, without requiring approval from the other members. It’s important to detail the rules around this decision and name all members with this power.

Lastly, depending on your industry, you may also want to include a non-compete clause to ensure your intellectual property is protected if a member leaves the company.

4. Member Voting Rules

In this section, you’ll want to outline how member votes work, the weight of each member’s vote, and how split votes can be broken. 

To start, you should list every member and the number of votes they receive, even if all members have an equal vote. Sometimes, founders or members who contributed more capital receive additional votes. You can arrange the voting structure as you please, so long as all members are in agreement. 

Another consideration to explore in this section is whether member voting meetings must be held in person and if a vote can be held if all members are not present.

5. Profit Distributions

Now, you’re ready to explain how your Alabama LLC’s profits will be split across your members. It’s important to detail this process for every member avoid any confusion or financial disputes down the line. 

You may choose to base distributions on each member’s initial contributions or percentage of ownership in the LLC. Some Alabama LLCs also opt to split all profits evenly among each member. Whatever you choose, just make sure you detail the exact amounts in this section of your Operating Agreement to protect the company.

This is also where you can outline the timing of these distributions (once a month, bimonthly, quarterly, etc.) and establish who will be responsible for making distributions. 

We recommend teaming up with a professional business attorney or accountant to double-check this section and ensure you are not missing any critical information.

6. Member Change Process

You’ll want to detail the process concerning adding additional members or removing members from your Alabama LLC. This section should take into account not only the operational process but also the financial implications.

First, you can set guidelines for adding new members to your Alabama LLC. Determine how members can be added, decide if a vote is required, and whether there will be an introductory period to the membership. Next, determine the financial contributions that will be required to add a member and detail the process of determining their profit distributions. 

After you’ve constructed a guide on how to add a member, you’ll also need to create a process for removing a member from your company. This may happen if a member plans to retire, decides to pursue another job, or if they become unable to work. Be sure to outline the process of removing a member, define a clear track for exiting the company, and determine any financial implications (such as buyouts).

It’s also important to determine how to handle a member leaving the company. This can happen if a member decides to pursue other interests or if they become incapacitated in any way. Outline the process for leaving and indicate any financial responsibilities and buyout processes.

Lastly, you’ll also want to establish a process for dissolving your Alabama LLC. Decide how this decision should be made, if a vote is required, the numbers needed, and how finances will be split.  

7. Meeting Requirements

In this section, you’ll want to outline the cadence and structure for membership meetings, company meetings, and any other top-level meetings your Alabama LLC might host. Although membership meetings are not required by Alabama state law, they will be essential for making important business decisions.

You can be as detailed as you like in this section, but we recommend noting the frequency of member meetings (once a month, quarterly, etc.) and determining what topics should always be covered. Ensure all members understand their roles and responsibilities in these meetings, and outline any topics that each member is in charge of managing.

You can also cover where meetings will be hosted, whether they’re necessary to attend in person, and how many members must be present to hold a member meeting. Lastly, be sure to plan for how emergency membership meetings can be held.

8. Record-Keeping

Since LLCs in Alabama are not required to file Operating Agreements with the state, they are also not required to keep records of these meetings. However, good record-keeping can play an important role in protecting your LLC. 

During membership meetings, your company will likely discuss important issues, changes, make significant decisions, and roll out new amendments. Good record-keeping ensures these decisions are reflected in real time, allowing all members to revisit transcripts or records, whenever necessary. Having access to meeting records can also be helpful if your LLC encounters legal trouble.

Be sure to decide how meetings records will be taken and determine where these records should be stored for easy access.

9. Human Resources Topics

Even if you don’t have a human resources (HR) department, your Alabama LLC will undoubtedly need to put a few HR rules in place.

In this section, be sure to outline any key HR regulations and policies that members and employees of your company must adhere to. This could include a general company code of conduct, payroll policies, paid time off, vacation day accrual, and payout rules, access to outside learning and training, and other key HR topics.

10. Operational Rules and Regulations

Lastly, you’ll want to outline your Alabama LLC’s specific operational rules and regulations. This section will cover how your company will run and determine your specific operating procedures.

You can go as in-depth here as you’d like and may want to share this section with outside managers and employees to ensure they adhere to your company’s operational rules. 

11. Severability Provision

This is a boilerplate legal clause that you may have seen in other contracts. It basically states that if one part of the Operating Agreement becomes invalid, that does not invalidate the other points. This ensures that one small error in your Operating Agreement doesn’t render the entire document meaningless.

Updating and Revising Your Alabama LLC Operating Agreement

Like all companies, your Alabama LLC is likely to grow or change with the market. These changes might conflict with your existing Operating Agreement, presenting the need to update and amend your existing document. To ensure your updates are as minimal as possible, we recommend reviewing your Operating Agreement with all members at least once a calendar year. A good rule of thumb is to review it when you’re preparing your annual report or updating any changes to your registered agent and/or registered office.

By meeting throughout the year to review your Operating Agreement, you’ll be able to review your policies and regulations to ensure they still serve your company’s best interests. Reviewing these topics more frequently means your team will be able to make small changes, rather than rewriting or amending entire sections of your agreement.

To update or make changes to your Operating Agreement, you’ll make amendments. These amendments should be kept on file with the original agreement (or added as addendums or amendments at the end of the document). You can also fully amend the entire Operating Agreement by completely rewriting it if you feel you need to start from scratch.

Common Operating Agreement changes include:

• Adding or removing members
• Updating financial distribution percentages
• Switching management styles (e.g., updating from member-managed to manager-managed)

All members must approve and should sign off on any amendments made to your Operating Agreement. Typically, a member vote is held to determine whether new amendments can be made. You may also need to amend your Certificate of Formation if any of the Operating Agreement changes are also reflected in this document. To do so, you can submit a Certificate of Amendment to the Alabama Secretary of State.

Partner With ZenBusiness for Professional Assistance

Even if you have a strong grasp on each section of your Operating Agreement, composing a formal business document can seem daunting. Luckily, ZenBusiness can offer a professional Operating Agreement template designed to help your Alabama LLC craft a customized and well-structured document that will help protect your business, confirm your LLC status, and outline your company policies.