By Lane V. Erickson, Idaho Business Attorney
An operating agreement of an LLC is created by the original founders of the company. An operating agreement is a contract between everyone who signs it. The purpose of the operating agreement is to describe the structure of the business, how the business will be managed, who the owners of the business are, and what percentages of ownership each owner has. The operating agreement will also contain information about how a new members of the LLC can be admitted into the business as well as specific restrictions on the transfer of an ownership interest in the business by a current member due to their death, disability, divorce or simply because the owner wants to get out of the business. As you can see, the operating agreement is one of the vital documents each LLC should have.
The operating agreement is so important, that if you fail to create one the statutes in Idaho will create a default operating agreement for you. Hint: it is far better for you to draft your own operating agreement than to rely on the default one created by the statutes. The scope and function of operating agreements is controlled by Idaho Code §§ 30-25-105 through 30-25-107.
The title to this article poses the question, can the LLC operating agreement be amended? The short answer is yes, it can be. In many instances it should be. Our team of Idaho business attorneys include partners Lane Erickson and TJ Budge, and attorneys Nate Palmer and Dave Bagley can help you with your LLC’s operating agreement so that it is current and meets the needs of your specific business. This includes helping you amend your operating agreement when needed. Each of our attorneys are skilled and experienced with business transactions and in helping our business clients especially when it comes to creating, preparing and/or reviewing their business records such as the operating agreement.
To help you better understand how your operating agreement affects your business, this article will talk about when your operating agreement needs to be amended. It will then discuss how the operating agreement is amended. Finally, it will review the importance of keeping accurate and good corporate records as part of your basic business practices. Keep in mind that this article is not meant to be exhaustive. Rather, it is only designed to be a guide to help answer some of your questions. If you need help amending your operating agreement, we have the knowledge and expertise to help you do it right.
When the Operating Agreement Needs to be AmendedSo when does your operating agreement need to be amended for your business? As stated at the beginning, an operating agreement is a contract between all the owners or members of the LLC who sign it. Like any contract, sometimes the relationships between the members of the LLC change. Alternatively, the members of the LLC may want to add an additional member to the company. Or, on the other hand, one of the original owners of the LLC may decide they no longer want to be an owner and they want to sell their interest to someone else.
In all of the instances described above the operating agreement would need to be amended because something about either the business or the owners is changing. The operating agreement should always accurately reflect who the current owners of the business are. If the owners to the LLC change but the operating agreement is not amended, the original operating agreement is still a valid and enforceable contract between all those individuals who signed it.
How the Operating Agreement is AmendedSo exactly how is an operating agreement amended? This could be done in one of two ways. The first, is to simply create a document called amendment to operating agreement. This document cites to a specific section in the original operating agreement and explains how it will be altered or changed through the amendment. After which, all the original owners of the LLC sign the amendment, the amendment is attached to the original operating agreement, and it now becomes a binding part of the original operating agreement replacing the sections that are mentioned.
The second way that this can be done is by replacing the entire original operating agreement with a new operating agreement. This is usually a good idea if the changes to the original operating agreement are substantial. When this happens, it’s much easier to replace the entire document than to attach a number of amendments to the original document. When this choice is being used, the document needs to state at the beginning that everyone signing the new operating agreement agrees to revoke the original operating agreement and replace it with the new one. By doing this, there are no misunderstandings that only sections of the agreement are being replaced rather than the entire agreement.
Importance of Keeping Corporate RecordsThis brings us to the final point of this article which is the importance of keeping good corporate records for your LLC. All of your LLC records should be kept in an organized and safe place so that any of the members of the LLC can review them at any time. This includes the operating agreement. If you have gone to the trouble to create an operating agreement or to amend an operating agreement with changes that needed to be made, but you do not keep the operating agreement or amendments in a place where they are safe, then they can easily be lost or destroyed. If this happens, the LLC does not have the basic corporate records it needs.
If a disagreement arises between the owners of the business and the operating agreement or amendments to the operating agreement cannot be located, then there is no binding agreement between the owners other than the default statutory agreement.
Corporate records can be kept in any number of ways. In the digital age, many companies keep their corporate records electronically. This is usually done in multiple locations in case there is a problem with the storage devices where the digital records are kept. Additionally, many businesses keep hard copies in a corporate record book such as a binder, or a filing cabinet. Where the business records are kept really is less important than the fact that they are kept.
If you were the owner of an LLC and you have concerns about your current operating agreement or feel that you need to make an amendment to your operating agreement we can help.
Enlist an Idaho Business Attorney to Help YouOur team of Idaho business lawyers can help you with any of your business structure or operation needs. Whether you are seeking to create a new business or review a current business, we are available to discuss your options and answer your questions at an initial free 30-minute consultation. Call us toll free at 877.232.6101 or 208.232.6101 for a free consultation. You can also email us directly at lane@racineolson.com or stop by our office at 201 East Center Street, Pocatello, Idaho 83201. We will answer your questions and help you solve your Idaho business problems.