Virginia LLC Operating Agreements

An operating agreement is used by members of a limited liability company (LLC) to establish the requirements for managing the affairs of the LLC, the conduct of its business operations and the rights and obligations of the members to each other and to the LLC. Virginia LLC law does not require the members of an LLC to make a written operating agreement; however, in order to avoid disagreement and controversy among the members, it is prudent to adopt a written operating agreement when forming an LLC.

Virginia LLC Law

Unless the members of an LLC prepare a comprehensive operating agreement, the provisions of Virginia LLC law will govern the rights and obligations of the members and the LLC by default. This can be undesirable in a couple of ways. First, the expectations of the members may differ from what is provided in the law. Second, the Virginia General Assembly has the power to change any provision in the Virginia LLC law at anytime, therefore reliance on a particular provision in the future is not guaranteed. A written operating agreement is necessary to assure that the continued operation of the LLC will meet the members' expectations.

LLC Governance

Unless an operating agreement provides otherwise, Virginia LLC law states that all LLC members are authorized to manage the LLC's business, which includes such things as authority to sign contracts in the LLC's name and incur debt. If the members do not intend this result, an operating agreement should be prepared that appoints a manager or managers for the LLC and states the extent of a manager's authority. The agreement also can specify the management structure for the LLC regarding appointment of officers for specific duties or committees for special projects.

Allocation of Profits, Losses and Distributions

One of the benefits of forming an LLC is the flexibility the members have to structure the allocation of profits, losses and distributions among the members, which is done through an operating agreement. In the absence of such an agreement, Virginia LLC law provides that each member shares in the profits and distributions based on a member's percentage of ownership; that is, a member owning 25 percent of the LLC must receive 25 percent of the profits and distributions. However, this can be altered in an operating agreement so that members allocate profits or distributions in an amount suitable for the members needs, rather than strictly by ownership percentage.

Contingency Planning

An operating agreement is particularly useful for contingency planning among the LLC members. For example, if an appointed manager is unable to carry out his duties, the agreement should specify a plan of succession, at least on a temporary basis until a new manager is appointed. Also, the LLC may need a capital infusion at some future time and the operating agreement can be used to specify the amount the members are willing to contribute. During the lifetime of any LLC, members are likely to desire to sell or otherwise transfer their interest in the LLC. The operating agreement should provide for the conditions of selling or transferring an interest, such as offering to the other members first.

References

• Virginia General Assembly: Operating Agreement
• Virginia General Assembly: Reservation of Power to Amend or Repeal
• Virginia General Assembly: Management of Limited Liability Company
• Virginia General Assembly: Sharing of Profits and Losses
• Virginia General Assembly: Sharing of Distributions
• Law Office of James D. Fife: LLC Issues

Resources

• Business.gov: Operating Agreements