Maryland LLC Operating Agreement
An operating agreement is a key legal document that sets forth the rules, procedures, and structure of an LLC, and you’ll definitely want to have one when starting an LLC in Maryland. The operating agreement is a binding contract between members, determining how the LLC will handle “big-picture” scenarios, including voting, transferring membership interest, allocating profits and losses, and dissolution.
A Maryland operating agreement is an internal document, meaning you don’t need to file it with the state. Even so, a strong operating agreement will benefit your LLC in a range of situations. Since we know that creating an operating agreement can be intimidating for many new LLC owners, Northwest provides free, attorney-drafted operating agreements you can customize to your LLC’s needs.
Why should a Maryland LLC have an operating agreement?
A Maryland 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.
Maryland Law §4A-402 states that LLCs may enter into an operating agreement but doesn’t require that they do so. However, adopting a solid operating agreement is crucial when starting an LLC in Maryland. Here’s why.
1. Your operating agreement proves you own your LLC.
Maryland does not require the names and addresses of all members and managers to be listed on Articles of Organization, so in an multi-member-LLC or manager-managed LLC, it may be difficult to prove you own your LLC with the Articles of Organization alone. That’s where an operating agreement with all members’ names and addresses listed is useful—in cases where you need to show a landlord or bank who owns your LLC.
2. An operating agreement can help reinforce your limited liability status.
To maintain limited liability status, an LLC must be able to prove that it is a separate legal entity from its members. An LLC can demonstrate this separation by keeping business and personal spending separate and by following the rules agreed upon in the operating agreement. Protecting your limited liability will be crucial if your LLC is ever served with a lawsuit. The operating agreement is one of your best tools for helping prove your LLC is its own legal entity.
3. An operating agreement can keep your LLC from getting bogged down by conflict.
Occasional disputes between members are an unavoidable part of running an LLC, so you’ll need a road map for resolving conflict and miscommunication. Since your operating agreement is signed and agreed upon by all members and covers a wide range of situations, consulting this agreement will help you resolve disputes.
4. An operating agreement can override Maryland’s default laws.
An LLC in Maryland that doesn’t have an operating agreement is automatically governed by default state laws. These laws may not meet the needs of your LLC. But if you have a customized operating agreement, you can better control how your LLC operates.
Maryland 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 Ebenezer v Riverwalk where the failure to actually adopt and maintain an operating agreement opened the door to inevitable disputes among the members resulting extensive and expensive litigation. The members of an LLC intended to develop a piece of real estate through a variety of complex agreements. In the complexity of it all, additional development opportunities emerged, seized upon by some members while other members remained ignorant. When those ignorant members became aware of the missed opportunity, they cried foul and brought legal action.”
Assuming good faith on all parties, this dispute emerges from a misunderstanding, as noted by the court, between self-dealing and misappropriation of corporate opportunity. Litigation and the entire dispute could have been promptly resolved internally, preserving valuable resources, had the members of the LLC taken the time to memorialize and distill their understanding into an operating agreement.”
What is included in a Maryland Operating Agreement?
Your operating agreement is the blueprint for all the major operations of your LLC. Your operating agreement could conceivably cover anything not disallowed by Maryland state laws, but here are the topics you should be sure to include:
- Membership interest
- Voting rights and decision-making powers
- Initial contributions
- Profits, losses, and distributions
- Bookkeeping procedures
Is an operating agreement required in Maryland?
There is no Maryland state law requiring an LLC to have an operating agreement. However, if you don’t have one, your LLC will be governed by Maryland’s default LLC statutes, and you may run into difficulty if you need to prove your ownership of the LLC or if you face a lawsuit.
Do I have to file my operating agreement in Maryland?
Nope. You don’t need to file your operating agreement with the state. The operating agreement is an internal document that your LLC keeps on record.
Does a single-member LLC need an operating agreement?
Absolutely. You may wonder why you need to sign a legal agreement with yourself, but an operating agreement is important to your single-member LLC in many ways, including for starting a business bank account or helping to prove your limited liability status in the face of a lawsuit. Without an operating agreement, you’re at greater risk that a court could view your LLC as a sole proprietorship—a business class that 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.