Kentucky LLC Operating Agreement
Your operating agreement is the blueprint for your Kentucky LLC. This legally binding document establishes the rules and processes for your LLC. It determines how your LLC will proceed in major situations, including voting, allocating profits and losses, transferring membership interest, and dissolving the business.
Unlike the Kentucky Articles of Organization, your operating agreement is an internal document that doesn’t need to be submitted to the Department of Business Filings. However, your operating agreement is one of your LLC’s most important documents, and you should take the time to craft a good one. Since we know this is no simple feat, Northwest provides free, attorney-drafted operating agreement templates customized for Kentucky LLCs.
Why should a Kentucky LLC have an operating agreement?
A Kentucky 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.
Per KY Rev State § 275.003, Kentucky LLCs are not required to have an operating agreement. However, drafting a comprehensive operating agreement is crucial for many aspects of your business. For example:
1. Your operating agreement proves you own your LLC.
In Kentucky, LLC members aren’t required to list their names on the Articles of Organization. This helps LLC owners live more privately, but it can make it more difficult to prove that you actually own your business. Since your operating agreement lists your members’ names and addresses, you can show it to a bank, landlord, or potential investor to prove ownership of your LLC.
2. An operating agreement can help reinforce your limited liability status.
In order to enjoy the benefits of limited liability protection, an LLC must be able to prove that it is legally separate from its owners. This requires LLCs to take certain steps, like keeping business and personal finances separate. A written operating agreement can also help you demonstrate that your LLC is a distinct legal entity with clear rules and protocols. If your LLC is ever sued, your operating agreement will be an essential weapon.
3. An operating agreement can help prevent unnecessary conflict.
Occasional conflict is a normal part of owning a business with other people, but you want to be able to resolve conflicts quickly and fairly. Since all of your members have agreed to your operating agreement, you can use it as a guidebook for getting back to your shared vision.
4. An operating agreement can override Kentucky’s default laws.
If you do not adopt an operating agreement, your LLC will automatically be subject to Kentucky’s default LLC statutes. This statutes might not work well for your LLC. That’s why it helps to have an operating agreement that is customized for your LLC.
Kentucky 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 Racing Investment Fund 200 LLC, where the LLC incurred a large debt and intended to dissolve entirely. Misconstruing the operating agreement and ignoring the central tenet of limited liability for the members of a LLC, the lower courts attempted to force the LLC members to contribute additional capital to the LLC in order to pay and discharge the LLC’s debt. Looking to the statutes, and interpreting the operating agreement through the lens of limited liability, the Kentucky Supreme Court eventually reversed the lower courts’ rulings and found that the LLC members were not required to pay additional capital into the LLC in order to pay and discharge the LLC debts.
“In its opinion the Supreme Court stressed the central tenet of the LLC was limited liability, and while there are some instances where members or managers of LLCs may retain their personal liability, such retention was the exception, not the rule. As such, in order for personal liability to extend to the members or managers of LLCs, such members or managers must explicitly declare or express their intention in writing to legally retain personal liability for the debts and liabilities of a LLC. For these reasons (and more), a reasonably prudent business owner would (and should) adopt and maintain an operating agreement.”
What is included in a Kentucky LLC Operating Agreement?
Your operating agreement should address all of the “big-picture” situations your LLC is likely to encounter. While you’re free to cover any topics not prohibited by Kentucky law, there are a few things your operating agreement should definitely include, such as:
- Transfer of membership interest
- Voting rights and decision-making powers
- Initial contributions
- Profits, losses, and distributions
- Management
- Compensation
- Bookkeeping procedures
- Dissolution
FAQs
Is an operating agreement required in Kentucky?
Kentucky doesn’t have any law requiring LLCs to have an operating agreement. However, operating agreements serve several essential functions for LLCs. You will likely be required to show an operating agreement to open a business bank account. And if you ever go to court, your operating agreement can help you maintain your limited liability protection.
Do I have to file my operating agreement in Kentucky?
No, you don’t need to file your operating agreement with the Kentucky Department of Business Filings. However, according to Kentucky Revised Statute § 275.185, you must keep any operating agreement you have at your business location, or at another location specified in your operating agreement.
Does a single-member LLC need an operating agreement?
Yes. While you might feel strange adopting an agreement with yourself, operating agreements are especially important for single-member LLCs. If you ever face a lawsuit, your operating agreement helps prove to a court that your LLC is a separate legal entity with limited liability status. A single-member LLC with no operating agreement could look perilously similar to a sole proprietorship, which does not have limited liability.
*This is informational commentary, not advice. This information is intended strictly for informational purposes and does not constitute legal advice or a substitute for legal counsel. This information is not intended to create, nor does your receipt, viewing, or use of it constitute, an attorney-client relationship. More information is available in our Terms of Service.