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Amending Your LLC Operating Agreement

By Lane V. Erickson, Idaho Business Lawyer

In the business world things often move quickly. As a result, owners of small businesses have to be flexible and sometimes have to be willing to change either the business structure or the operation of their small business in order to be successful. These changes could include simply a change in the business name, or it could include a more complex change such as who the owners of the business are or where the business will be located. Additionally, changes could include having the current business owners invest more of their money, property other assets or even their time into the business to take care of management. Whatever the changes that are needed, most business structures, including LLCs, allow for these changes to occur so that the business can move forward and be successful.

At the Racine law office we have assisted our clients in the creation, operation, and structure of their business entities including LLCs for more than 70 years. Our team of experienced and skilled Idaho business lawyers can help you work through either the simple or the complex changes that your business needs for it to be successful. Our team of attorneys includes partners Lane Erickson and TJ Budge, and attorneys Nate Palmer and Dave Bagley who together can provide essential business counsel and advice on all business issues including business structuring, financing, planning, and taxes.

The purpose of this article is to discuss the process of amending your LLC operating agreement. Additionally, this article will describe the reasons that you may need to amend your operating agreement. If you have questions or concerns about amending your operating agreement we suggest that you read this article and then contact us so that we can provide specific guidance and counsel to you about your own particular business.

Can The Operating Agreement Be Amended

An operating agreement is one of the founding documents used when creating an LLC. An operating agreement usually contains the formal name of the business, the principal place the business will be organized, the names of the owners of the business, and the percentages of ownership each owner has in the business. Additionally, the operating agreement usually provides specific information about who has management rights in the business, and what happens to the ownership interests of the owners in the event of a death, disability, or divorce of one of the owners.

When it comes to amending your operating agreement the place to start is to determine whether or not your operating agreement can be amended. As is discussed in more detail below, an operating agreement is a contract, and because of that the language contained in the operating agreement will determine whether or not it can be amended by you and the other owners of the LLC. As a result, if there is any event that would require the operating agreement to be changed or amended, you first need to read through the original operating agreement to make sure that it can be amended.

Most well-written operating agreements do have written terms or conditions that allow the operating agreement to be amended based on either a unanimous vote of the current owners of the business or a majority vote of those owners. However, we have from time to time come across operating agreements that were created online, or that were created by the individuals themselves, that contain restrictive language is that forbid an amendment of the operating agreement to be made. Although this is rare, it does happen from time to time. Even if this has occurred, so long as all the members of the business decide they do want to change either the structure of the business or the language in the operating agreement they would have the ability to do so unanimously.

On Operating Agreement is a Contract

This brings us to the heart of what an operating agreement is. Between the owners or the members of the LLC, the operating agreement is a contract. The contract contains specific terms and conditions that bind each of the owners of the business to act exactly how the operating agreement states they are required to act. Because it is a contract, if any of the members of the business fail to follow the terms and conditions set out in the operating agreement they will be considered to have breached that agreement, and they could be liable either to the business itself, or to the other owners of the business.

Idaho law does not allow a person to breach a contract simply because things haven’t turned out well for one of the contracting parties. Rather, when a party enters into a contract, they are bound to perform all of the terms and conditions set forth in the contract. If a person does breach an operating agreement’s terms, it is likely that damages could result to the other owners of the business. In a worst-case scenario, this would allow one owner of the business to file a lawsuit against another owner of the business to collect damages or money from them. Our goal when we create operating agreements is to avoid this situation whenever possible.

As was mentioned above, if all the owners of the business agree that the operating agreement should be amended, then it is usually a fairly simple process to get done. However, based on the terms and conditions of the operating agreement, if one of the owners decides they do not want to amend the operating agreement, they may be able to stop the other members from doing so. This then may result in the business operation ceasing. In other words, the business could come to an end and dissolve.

Best Practices for Amending Your Operating Agreement

When we assist our clients in the amendment of their operating agreement we usually follow very specific steps. The first step is that we discuss the change with all of the owners of the business to make sure that everyone understands what the changes will be at that they agree to those changes. The next thing we do is we prepare a draft amended operating agreement which we then circulate to all of the owners of the business. This gives each of the owners an opportunity to read through the proposed amended operating agreement so that they can see the changes that are being made. Again, our goal is to make sure that all of the owners of the business understand what the changes will be.

We then usually try to have a meeting with all of the owners of the business to go over the changes and make sure that everyone understands them in the same way. During this meeting, often additional changes are suggested which can then either be accepted or rejected by the rest of the owners of the business. At the end of this meeting we usually have all the notes and information we need to make the final changes to the amended operating agreement.

Once we have a finalized version of the operating agreement we then circulat it again among all the owners of the business to make sure that they all have had an opportunity to review those changes. Throughout this entire process, we recommend that each of the owners of the business hire their own attorney to review the amended operating agreement with them individually adn to provide them with individual legal advice about how these changes could affect them personally. Once everyone is satisfied then we have each of the owners of the business sign the new or the amended operating agreement. Once it is signed, the amended operating agreement becomes the new contract between the owners of the business replacing any previous operating agreements.

Enlist an Idaho Business Attorney to Help You

Our team of Idaho business lawyers can help you with any of your business structure or operation needs. Whether you are seeking to create a new business or review a current business, we are available to discuss your options and answer your questions at an initial free 30-minute consultation. Call us toll free at 877-232-6101 or 208-232-6101 for a free consultation. You can also email us directly at lane@racineolson.com or stop by our office at 201 East Center Street, Pocatello, Idaho 83201. We will answer your questions and help you solve your Idaho business problems.

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