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Does Your LLC Operating Agreement Need to Be Updated?

By Lane V. Erickson, Idaho Business Attorney

Life is wonderful because it just doesn't stand still. In other words, changes are always coming down the path we are on as we move forward in life. While it's true that many people don't like changes in their lives, I’ve found that business owners often love and embrace change.

Most of the business owners I represent recognize change as an opportunity for growth. Because of this, the best business owners are always seeking some sort of change that will help them improve and will improve their business.

This doesn't mean that change is easy, it just means that it is necessary to help your business continue moving forward. The good news is that the premier Idaho business lawyers at the Racine Law Office have been helping their business clients meet the changes they face head-on for more than 70 years. We have the experience and knowledge that can help you embrace these changes and make them a valuable part of your business.

When your business is structured as an LLC, one of the most important things that you should consider if your business is going through any kind of change is making sure your operating agreement is updated.

As a reminder, the operating agreement is the controlling document for an LLC. The operating agreement acts as a contract between the owners of the business. The purpose of an operating agreement is to identify the owners of the business, the percentages of ownership each owner holds, how the management is structured in the LLC, and it also contains specific limitations on the transferability of the ownership interest owned by each other.

If your business is structured in an LLC, the remainder of this article talks about the things that you should consider changing or updating in your operating agreement whenever your business goes through any type of change.

Do You Already Have an Operating Agreement in Writing?

The first place to start is whether you already have a written operating agreement. If you do not, then in Idaho, the statutes create a default operating agreement for you. This is not necessarily a good thing because it is simply the default that does not take into consideration the circumstances or specific needs of the owners, or of the business itself.

So the number one concern is if you don't have any type of operating agreement for your LLC, then create one now. This can be easily done by consulting with a qualified Idaho business lawyer. It's always best to get the operating agreement done when everything in the business, including the owners, is moving forward smoothly. Obviously it's much more difficult to get it done if any problems or disagreements arise.

If you already have a written operating agreement you may still consider making changes to it if the structure or owners of your business have changed. These will be discussed in more detail below, but the important thing to understand is that even when you have a written operating agreement it can be amended, altered, changed, or completely replaced, so long as all of the owners are willing to sign the new agreement. Again, we recommend that you work with a qualified business lawyer to help you accomplish making any changes to your operating agreement.

Have the Owners of the LLC Changed?

An update to your operating agreement is important to make anytime the owners of the LLC change. In most operating agreements, there is a form that allows new owners to become owners so long as they are willing to accept and be bound by the existing operating agreement. When this happens, the only update to the operating agreement that is really needed is the list of owners and the percentages of ownership. Once these are updated to accurately reflect the actual owners and percentages of ownership at that given time, there may be no other need to change the operating agreement.

However, a person who's coming in as a new owner may insist on making other changes to the operating agreement. Often the new person who's coming into the business is an investor who may not want to be in management or in control of the business itself but rather simply change the management structure or the way the business is operated.

On the other hand, many times when a new owner comes into the LLC, this has a direct impact on who is in control of the business. The new owner may want to be the sole individual in control of the business or have at least a say in the management structure of the business.

Has the Management of the LLC Changed?

This takes us to the last area when it becomes necessary to change the operating agreement. Regardless of whether ownership is changed, it's possible that as the business has moved forward its management needs have changed. In other words, after having some experience in the business, the owners may realize that the current form of management will not allow the company to accomplish what it needs to. For this reason, if the current owners change the management structure of the business, this new management structure should be reflected in a written update to the operating agreement.

Also, as mentioned above, whenever new owners come into the business, they may want to change the management structure of the business. If all of the owners, including the new owners agree to this as part of allowing the new owner to come into the business, then the operating agreement should be restructured to describe how the new management system will work.

There are many reasons why an operating agreement for business may need to be updated or changed. This is not necessarily a bad thing. Rather, it may reflect the growing circumstances of the business. Whatever the reason, if you find that a change to the operating agreement is needed, we can help. We have assisted numerous clients and updating their operating agreements for their LLC business and we are confident that we can help you too.

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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