Why should an Alabama LLC have an operating agreement?
An Alabama LLC should have an operating agreement because a company cannot act for itself. In order to operate, LLCs require real humans (and other entities) to carry out company operations.
According to Alabama Code 10A-5A-1.08, LLCs are not required to have an operating agreement. That said, having a well-drafted operating agreement on hand is essential for many aspects of your business. For instance:
1. Your operating agreement proves you own your LLC.
Unlike your Alabama Certificate of Formation—which is a public document and doesn’t have to include the names of any of your LLC’s members—your operating agreement will include the names of all members. Because it’s a legal document, you can use your operating agreement to show you own your LLC when you take important steps, like opening a business bank account.
2. An operating agreement can help reinforce your limited liability status.
An LLC must take steps to show it is a legal entity separate from its owners in order to maintain limited liability. One way to do this is to open a separate bank account for your LLC. Another is to form business policies and procedures to create that separation, then formalize them in a written operating agreement.
3. An operating agreement can help prevent misunderstandings.
Unfortunately, disagreements and misunderstanding are natural—and probably inevitable. But your operating agreement can help prevent misunderstandings from getting out of hand by outlining how your business will proceed in various situations.
4. An operating agreement can override Alabama’s default laws.
An LLC without an operating agreement is automatically governed by Alabama’s default laws. The problem is, these laws might not work for your particular business. Creating an operating agreement for your LLC will help you govern your business (within the bounds of the law) in a way that works for you.
Alabama Case Law
We asked our lawyers for an example of how an operating agreement can make or break your LLC. Here’s what they said.*
“Consider the case of Fleetway Air Freight & Delivery Service, L.L.C. where the member managing the LLC’s daily affairs of the business was terminated as manager then ejected as a member, contrary to the ejected member’s wishes. Ultimately, the courts sided with the ejected member, with the Alabama Supreme Court relying heavily on the internal LLC documents which included an operating agreement and a subsequent members agreement. Assuming all parties in Fleetway were acting under good faith interpretations of the internal LLC agreements, this case is an excellent example of why it is important for the members to think about, discuss, and memorialize their understanding of how the LLC should be directed during pivotal moments, such as when the passive members are dissatisfied with the actions of the managing member.
“Had the members in Fleetway discussed these future possibilities, and amended their operating agreement accordingly, valuable resources of the LLC and members could have been preserved for more fulfilling purposes. For these reasons (and more), a reasonably prudent business owner would adopt and maintain an operating agreement.”
What is included in an Alabama operating agreement?
Your Alabama operating agreement is one of your most important internal documents. While you can include anything (within the law) not already covered by Alabama’s LLC statutes, a good operating agreement includes information about:
- Transfer of membership interest
- Voting rights and decision-making powers
- Initial contributions
- Profits, losses, and distributions
- Bookkeeping procedures