Why should a Montana LLC have an operating agreement?
A Montana 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 MCA §35-8-109, your LLC MAY enter into an operating agreement, but the statute doesn’t explicitly state that it must. However, you will need an operating agreement to maintain your LLC. Here’s why:
1. You’ll need an operating agreement to open a business bank account.
After you file your Montana Articles of Organization, you’ll want to open a bank account for your business. Why? Your LLC only has limited liability if it can prove it’s a separate entity from its owners. Mixing personal and business spending erodes this separation, so it’s crucial to open a business bank account and keep your business finances separate. When you head to the bank, you’ll need to bring a copy of your operating agreement.
2. An operating agreement can help reinforce your limited liability status.
To benefit from limited liability status, business owners must be able to show that their company is its own legal entity separate from its owners. One way to do this is to open a business bank account and keep spending separate. Another way is to create (and follow) an LLC operating agreement.
3. An operating agreement can help head off misunderstandings.
It’s probably impossible to eliminate disagreements and misunderstandings within any company. (We’re all only human, after all.) But having an operating agreement that establishes rules and procedures for your company can help prevent those minor snags from undoing your LLC.
4. An operating agreement can override Montana’s default laws.
If you don’t have an operating agreement, your LLC will automatically be governed by the default laws in Montana’s LLC Code. The problem is, these statutes might not fit your business. Creating an operating agreement will allow you to run your company in the way you see fit.
Montana 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 Pastimes, LLC v Clavin, where the failure to adhere to the express provisions of the operating agreement resulted in expensive and extensive litigation at the expense of the remaining member and LLC. The Pastimes case is an excellent example of why it is important for members to distill their understanding in writing. Due to the remaining member’s decision to disregard the express terms of the operating agreement which required the LLC to be dissolved upon the death of one of the two LLC members, the courts found that the remaining member orally modified the operating agreement.
“In contrast, the courts sided with the remaining member on other issues involved in the litigation precisely because those issues were covered in the LLC’s operating agreement. For these reasons (and more), a reasonably prudent business owner would (and should) adopt and maintain an operating agreement.”
What is included in a Montana operating agreement?
According to MCA §35-8-109, an operating agreement “need not be in writing.” But a verbal agreement won’t do you much good—for one thing, it won’t hold up in court. A strong (written) operating agreement is essential, and should include information about:
- Transfer of membership interest
- Voting rights and decision-making powers
- Initial contributions
- Profits, losses, and distributions
- Management
- Compensation
- Bookkeeping procedures
- Dissolution
