Why should a Vermont LLC have an operating agreement?
A Vermont 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.
Vermont Statute 11 V.S.A. § 4003 lays the groundwork for Vermont LLC operating agreements, but it doesn’t explicitly state you need to have one. However, you will need an operating agreement to maintain your LLC. Here’s why:
1. Your operating agreement proves you own your LLC.
You aren’t required to include the names of all (or any) members or managers when you file your Vermont Articles of Organization. This helps with maintaining privacy, but doesn’t help you show proof of ownership. This is where your operating agreement comes in.
Your operating agreement includes the names of all members, which means you can use it to show you own your business. This is required for opening a business bank account.
2. An operating agreement can help reinforce your limited liability status.
To benefit from limited liability, business owners need to show that their LLC is its own legal entity separate from its owners. One way to do this is to open a business bank account. Another is to create (and follow) an operating agreement.
3. An operating agreement can help head off misunderstandings.
Your operating agreement is a legal document that lays out rules and processes for your LLC, which all members must follow. Having established rules—especially ones written down—might not eliminate misunderstandings entirely, but it will help prevent misunderstandings from flaring up into bigger issues.
4. An operating agreement can override Vermont’s default laws.
Any Vermont LLC without an operating agreement must automatically abide by Vermont’s default LLC statutes. The problem is that these default laws might not work for your company. Having an operating agreement ensures you’re able to run your company the way you see fit.
Vermont 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 Industrial Space Realty LLC, where a member received a windfall victory from the courts, primarily due to the existence of an operating agreement. In that case, members sought judicial dissolution of their LLC along with a determination of who was entitled to the remaining LLC funds. The courts rejected all arguments from one of the members claiming entitlement to (part of) the LLC funds. Pointing to the clear and unambiguous terms expressed in the LLC operating agreement, the courts rejected all of that member’s arguments and determined that all of the LLC’s remaining funds (over $1 million) belonged to the member who fulfilled his capital contributions along with additional contributions during the life of the 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 Vermont operating agreement?
Technically, your Vermont operating agreement can include anything (within the law) not already covered by Vermont’s statutes. However, a strong 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
- Bookkeeping procedures