How to change your LLC operating agreement
When you formed your limited liability company (LLC), you probably created an operating agreement to help govern your business. This agreement is a great way to track membership, ownership stakes, and the roles and responsibilities of those involved in the LLC’s management.
As your business progresses, you may need to amend your LLC operating agreement. This means you wish to change the document that lays out the guidelines used to run your business. This post will walk you through the necessary amendment steps.
- Changing your LLC operating agreement usually requires consent from all existing members.
- You may change your operating agreement for many reasons, including if you implement new governance rules for your LLC or if ownership stakes change.
- You may have to update your BOI report if you amend your operating agreement.
Reasons to amend an operating agreement
You’ve drafted your company’s Articles of Organization and completed your initial operating agreement. At this point, you may be so tired of paperwork that you don’t see a reason for amending your existing LLC operating agreement.
However, there can be some long-term benefits to keeping your operating agreement as up-to-date as possible to reflect the current state of your business.
Let’s review a few changes that could warrant an amendment to your document.
There may come a point where an existing LLC member’s capital contributions change. This could mean they’re not entitled to a higher ownership interest in the business. Or you may welcome a new member. This may require you to consider their capital contributions and amend the ownership percentages of all existing members.
In both cases, amending your company’s operating agreement is likely a good idea. Doing so will ensure everyone’s membership interests are properly accounted for.
In a member-managed LLC, at least one of the company’s members takes responsibility for overseeing the day-to-day operations of the company. Typically, you’ll use an operating agreement to assign those responsibilities. This gives all sides a document to refer to if disagreements arise.
With manager-managed LLCs, a third party who isn’t an LLC member handles the day-to-day operations. Again, you’ll likely use your operating agreement to denote this outside party. The operating agreement should also include their responsibilities and their interactions with other members.
If you choose to switch from one management structure to the other, you must amend your operating agreement to reflect the changes. You may also have to make a filing with your Secretary of State to update how your LLC is managed.
An LLC’s formation process varies from state to state. But usually, it requires you to complete Articles of Organization and name a registered agent. In the case of the latter, you may use a third-party agent under your state’s rules on registered agents, according to the U.S. Small Business Administration.
The details in your formation documents are typically recorded in your operating agreement. So, any change in the registered agent, LLC name, or business address is grounds for an amendment.
Regardless of your amendment, consider consulting a lawyer and receiving legal advice before changing your operating agreement.
LLC operating agreement vs. articles of organization
Though you may create them simultaneously, your LLC’s operating agreement and Articles of Organization are different documents.
Your Articles of Organization are the forms you submit to the Secretary of State (or equivalent state authority) to start your business. They typically come with a filing fee and require you to list the name, address, purpose, and, in many cases, the registered agent for the business.
Many of the details from your Articles of Organization may find their way into your business’ LLC operating agreement. However, the agreement is more focused on defining the intended structure of your LLC. It’s usually internal – few states legally require you to have one. Additionally, you may use it to set rules and bylaws for the company. Plus, you can use your operating agreement to note your members’ roles, contributions, and ownership interests.
How to make an amendment to your operating agreement
Now that you know the changes that may call for an amendment, it’s time to figure out how to make updates. Keep in mind that the specifics may differ depending on your state and how you’ve organized your business. However, keep reading for three general steps you may follow.
Any member can suggest a change to your LLC operating agreement. However, you can’t put that change into place without the approval of the rest of the members. After all, your operating agreement is a legal document. Granting every member the power to change it whenever they feel like it could lead to chaos within your business.
After a change is suggested, the proposed amendment to your original operating agreement goes to a vote between all members. If the proposal is approved, you can move forward with implementing the change. In some cases, depending on the rules you drafted in the operating agreement, the change may be approved via a majority vote.
As with most major issues your business’s decision-makers confront, the procedure for making changes to the agreement should be clearly described in the agreement itself. If this isn’t the case, you will need to consult your state’s default rules for the percentage needed to approve a change.
It’s also worth noting that single-member LLCs have it easier here. As the only member of the LLC, you are essentially the sole decision-maker. You can make changes to your operating agreement at your pleasure, at least until you welcome new members into the fold.
2. Draft an amendment to the LLC operating agreement
Once all members (or the majority, depending on your business’ guidelines) agree to amending an LLC, you move on to drafting that amendment into your document. Consider obtaining legal advice for this step. Your operating agreement is essentially an internal contract. Assistance from a lawyer may help prevent you from making an unwise change or amendment that leaves you in an unfavorable position.
Consider including the following when making your operating agreement amendment:
- LLC name and state of operation
- Amendment date
- The section of your operating agreement that you’re amending
- A statement declaring your intention to amend the chosen section
- The amendment itself
- A further statement clarifying that all other sections of your operating agreement remain in force
- A statement confirming you followed the proper procedures for making the amendment
The last step is also the simplest: have all the members of the LLC sign the amended agreement.
Assuming you achieved unanimous agreement for the change in Step 1, this shouldn’t be a problem. Do you have a member who refuses to sign and slows down the process? You may need to go back to square one. You will likely need to convince them of the need for the amendment before you can move forward.
From January 1, 2024, all small businesses that were created by filing organizing documents with a secretary of state, such as LLCs and corporations, need to complete a Beneficial Ownership Information (BOI) Report. This report goes to the Financial Crimes Enforcement Network (FinCEN).
FinCEN uses the report to identify beneficial owners in a business. These include all those who own or control at least 25% of the business and those who exert substantial control through their position or ownership stake. It’s intended to help FinCEN get ahead of issues, including money laundering and tax evasion.
Your LLC operating agreement change could require you to change your BOI report. For instance, if a member gains an increased ownership stake, owning at least 25% of the LLC, they become a beneficial owner. So, in such circumstances, you’ll need to update your report. Seek the advice of an attorney who can review your specific circumstances and guide your decisions to confirm that you are doing what’s right for you.
You have 30 days after the date you make the amendment to update your BOI report. Changes are recorded directly with FinCEN. There may be harsh civil and criminal penalties in place for failing to provide accurate information. These penalties may include the following:
- Civil fines of $500 per day until the infraction is fixed, up to a maximum of $10,000
- Further criminal fines and the potential of imprisonment for up to two years
File an updated BOI report today with Block Advisors.
Propose the amendment to members, get their agreement, and then work with a legal professional to draft it into your operating agreement.
There’s no limit on how often you can update an operating agreement, assuming you receive approval from LLC members each time.
You can handle amendments to operating agreements internally in New York by following the 3-step process mentioned in the article. However, any amendments that change crucial details of your company, such as its name or address, also require you to file a Certificate of Amendment with the state.
You can follow the 3-step process in this article to amend your operating agreement in California. However, you can only make changes to the information in your Articles of Organization if you submit an Amendment to the Articles of Organization of a Limited Liability Company form.
What are the different ways you can amend an LLC operating agreement?
If you clearly state that you can change the operating agreement and set the rules, you control the process. The structure changes outlined in the article cover how most LLCs evolve. As your LLC progresses, you may need to tweak information, including management structure, capital contributions, business name, state of operation, and more.
Usually, you propose an amendment, and LLC members vote. Assuming the vote passes, the amendment is built into the operating agreement and signed by all members.
You may amend an agreement for a few reasons. For example, when a new LLC member joins, a change in membership stakes occurs, or you want to change any rules used to govern the company.
Amendments work the same for LLCs with S Corp election as regular LLCs. That’s because an S Corp isn’t a state-level business structure. Meaning it does not impact how an LLC works for state law purposes. Instead, it is a federal tax classification.
This article is for informational purposes only and should not be construed as legal advice. You may want to seek the advice of an attorney to evaluate all relevant considerations.
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