Maryland LLC Operating Agreement
Maryland limited liability company law defines an operating agreement as any agreement between the LLC owners -- called members -- that relates to the conduct of the LLC's business and company affairs. Except for a decision that requires the unanimous consent of all members, Maryland LLC law does not require an operating agreement to be in writing. This means that virtually any statement or conduct of the LLC members can be interpreted as constituting part of an operating agreement. In order to avoid controversy and meet the members' expectations, the members should adopt a written operating agreement (see Resources).
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Maryland LLC Law
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Maryland LLCs are governed by the Maryland Limited Liability Company Act set forth at Title 4A, Sections 4A-101 to 4A-1103 of the Maryland Code. Without an operating agreement, the default provisions of the act will control the relationship among the LLC members regarding all aspects of the LLC, such as voting rights, capital contributions, management authority and the distribution of profits and losses. Relying on the default code provisions could prove unworkable if the members' expectations are different from what the code provides. Also, the act can be amended or revised by the Maryland Legislature in the future, which could undermine reliance on how the act exists at the time the LLC is formed.
LLC Management
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The default provisions of Maryland LLC law provide that each member of the LLC is an agent of the LLC for purposes of carrying on its business. This means that any member can sign a contract or incur an obligation on behalf of the LLC -- which may be contrary to the understanding of some members when forming the LLC. For example, although several members may be contributing most, if not all, of the LLC's capital, other members may be contributing their services and expertise in the LLC's business. In this case, a written operating agreement should be prepared that specifies the LLC's manager or managers who have authority to run the business, sign contracts and incur debts. Otherwise, the members lacking expertise may lawfully incur an obligation that could impede or undermine the efforts of the members whose expertise is required to run the business.
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Allocation of Profits, Losses and Distributions
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Although the default provision of Maryland LLC law states that allocation of profits and losses among the members is to be in proportion to their capital contributions, this provision also expressly states that this can be altered in an operating agreement. This is particularly useful in situations where some members are providing more monetary capital than other members and intend their monetary contribution to be a passive investment, rather than being involved in the day-to-day operations of the LLC's business. The passive investment members may be in a better position to wait for the business to become profitable and can use the initial losses to offset income. A written operating agreement could allocate a greater percentage of the profits and losses to the passive members and compensate the members involved in the day-to-day business operations with a salary, regardless of the actual percentage of capital contributions of the members.
Contingency Planning
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An important part of any operating agreement is planning for contingencies that will affect the membership or dissolution of the LLC, such as the death, disability or withdrawal of a member. As with other aspect of the default provisions of Maryland LLC law, these provisions can vary from the members' expectation and needs of the business. For example, Maryland Code Section 4A-605 allows any LLC member to withdraw from the LLC by giving six months written notice to the other members. During this six-month period, the withdrawing member still retains voting rights and, if he is involved in the day-to-day operation of the business, will still have the ability to exercise control of the business. If the circumstances of the withdrawal are acrimonious, it's probably unwise for the withdrawing member to have further control over the business. In order to avoid this type of situation, a written operating agreement should specify the conditions of withdrawal, as well as provide a mechanism for selling or transferring the withdrawing member's interest in the LLC.
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