What Is an Operating Agreement?

And other questions a lawyer can answer when setting up an LLC in Wisconsin  

When Leslie B. Elkins, an attorney at Kramer, Elkins & Watt in Madison, Wisconsin, meets with potential clients who are looking to start a business, she has a checklist she works through, and then takes questions. After making sure the client can actually start the business, she finds out if they have partners, their financing and insurance, and whether or not they plan on having employees.

If it’s possible, she often recommends a limited liability company (LLC) for structuring. “It’s just a really nice, flexible option for those who can do it,” she says.

One of the most common misconceptions sees related to LLCs is her clients not thinking they need governing documents. “I think it’s a frequent thing for people to think they can get away with not having,” Elkins says. “I also think that people are intimidated by the cost, and just think that it’s not that important.”

If you’re setting up an LLC—the company structure that, Elkins says, makes up about 75 percent of her clients—your governing document in Wisconsin is an operating agreement. “The operating agreement lays out various facets of the company,” she says. “It’s extra important if there are two or more members.”

The facets of an LLC that an operating agreement will lay out can include:

  • What happens if one, multiple, or all the members wants to leave the company
  • What happens if one, multiple, or all the members wants to sell an interest in the company
  • What happens when a member becomes disabled or dies
  • Who has voting control
  • What matters require 100 percent vote, or the majority vote

“It also covers financials, and it depends on how the LLC is taxed, but it can cover payments to individuals in the event of a profit,” adds Elkins. “[But] where it comes into play the most is what happens when the members of the LLC no longer wish to be members, or want to sell the company or sell an interest.”

Once an operating document is in place, it can be altered at any time by the members. Therefore, any time a company is bringing on a new member, or the financial or tax structure of the company changes, the document should be looked over. “Even every few years, if your business grows, you should make sure that the operating agreement properly reflects the desires of the company,” says Elkins.

Governing documents are state-specific, so it’s recommended that if you are looking to form a company, you speak with both an accountant and an experienced Wisconsin business attorney.

“A lot of these online legal services will have a company register in Delaware, even a tiny little LLC that’s just a one-person startup,” says Elkins. “It doesn’t make sense for a small company because then, in addition to your original Delaware registration, you would have to register to do business in Wisconsin.”

She continues: “You don’t want a cookie-cutter document; you want a document that actually reflects your company and your specific wishes. Most of those internet documents are copying the statutes and pasting them onto the paper. Essentially … these documents from internet legal companies just parrot the statute. So, it’s essentially the same as not having anything at all.”

While Elkins works with companies who are both tackling problems proactively and putting out fires, she prefers the former. “I want to help people from the get-go. We help people that call that are already in hot water over the issue. It is so much cleaner if we can talk to people ahead of time,” she says. “We can identify all the things that business owners don’t think about, and help highlight what needs to be focused on.”

For more information on this area of the law, see our business overview.

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