Alabama LLC Operating Agreement: Drafting Checklist

Forming an LLC in Alabama will require prospective business owners through drafting several legal documents. One of the quintessential ones is the operating agreement. 

It's wise to create this document when setting up a business, regardless of state legislation. This document is a roadmap for how your LLC will run, so you'll want to set it up correctly from the start.

Key Takeaways

• An LLC operating agreement is a legal document that outlines your LLC's procedures and ownership structure.

• While not a state law mandate in Alabama, having an Alabama LLC operating agreement is highly advisable for clarity in business and legal protection.

• Small business owners should consider using a filing service to ensure their operating agreement is compliant and accurately assembled reliably.

What Is an LLC Operating Agreement?

Once all the paperwork for forming an LLC reaches the Secretary of State and they accept it, it's time to draft an operating agreement. This document is much more than another piece of bureaucracy — it sets out a blueprint for how the business should run, including rules and procedures that everyone must follow. A responsible business owner will want to have something like this in place, so everyone knows exactly where they stand.

• Outlines the duties and obligations of each organization member: From decision-making authority, operational tasks, and financial contributions, an operating agreement ensures everyone involved knows what role they play and what is expected of them, which helps avoid potential conflicts later down the line.[1]

• Defines how much initial contribution each LLC member has made in the venture: This is useful for determining who gets how much of the profits or losses and can also map out when more capital will come in if necessary.

• Allows the LLC to decide how to divide up profits and losses among its members: This could be based on their input in terms of capital, or it could be an arrangement that everyone agrees upon. It's an excellent way for the LLC to cater to its members' needs.

• Sets out the LLC's operational strategy: It covers how the business runs, outlining decision-making and dispute-resolution methods. This provides a reliable blueprint for the company and discourages disagreements or miscommunications.

An LLC operating agreement is more than just a document; it's a cornerstone of your Alabama limited liability company. It helps keep everyone on the same page with structures and rules to help your business run efficiently and amicably. It prevents misunderstandings from cropping up and keeps expectations clear. In other words, an LLC operating agreement is essential for any business looking to succeed.

State Requirements

Starting a limited liability company (LLC) in the state of Alabama does not require an operating agreement. But creating one can be immensely helpful for organizing your business's internal operations. 

Even though you don't need to submit it to the Alabama Secretary of State, the document will simplify your business privilege tax returns. Plus, it can provide protection and clarity for both you as a business owner and your LLC.

LLC Operating Agreement Benefits

• Provides an avenue to settle disputes between members quickly and amicably without resorting to legal battles, adding peace of mind that all parties are satisfied with the outcome, whatever it may be.

• Gives members the option to create their own rules for dividing up earnings and losses, meaning they can go beyond the default even-splitting or allocation based on ownership stakes and adjust the criteria that fit them best.

• Outlines a set of rules that governs how your business operates, shows others that you take your business seriously, and reflects dedication and professionalism, which could make potential partners, investors, and clients more likely to believe in your mission.

• Includes rules governing ownership transfer so that unwanted parties cannot join the LLC without existing members' permission, safeguarding the LLC members' financial interests.

• Provides clarity and ease on what happens if a member needs to exit the business or, sadly, passes away, making managing the company through turbulent periods much smoother.

• Gives you the freedom to adapt and tailor the duties and responsibilities of members and managers, ensuring that the business works in tandem with your objectives and strengths for maximum benefit.

• Allows you to clearly define the roles and responsibilities of the members of your company, so if you ever decide to expand operations into other states where such agreements are mandatory, you'll be covered and remain compliant with local laws.[2]

Who Needs an Operating Agreement?

Any business entity, big or small, domestic or foreign LLC, should have an operating agreement. This document is worthwhile in Alabama and any other state, for any LLC — a single-member LLC, multi-member LLC, or S corp. 

Without an operating agreement, your LLC will default to the state's rules and regulations,  potentially undermining what is best for you and your business.

Drafting Your Alabama LLC Operating Agreement

Forming an Alabama LLC takes a few steps, but you can create your operating agreement from scratch or use an operating agreement template. To ensure you comply with Alabama's Secretary of State, you should double-check that all necessary information is already in the document at the time of the LLC formation. 

Here's a handy checklist to get started:

Step 1: Provide Business Information

First, you'll need to provide basic business information about your new LLC in Alabama. This includes your business name, which must comply with Alabama's naming requirements, industry, registered agent, registered office address, and EIN.[3]

Step 2: List LLC Members

The second step is to list the LLC's members. If it's a single-member LLC, it shouldn't be an issue. However, for a multi-member LLC, there should be thorough documentation such as ownership percentages, who has contributed capital and how much, and their roles and responsibilities. 

Step 3: Decide Member-Managed vs Manager-Managed

Next, decide on how your LLC will be managed, be it by the members (LLC owners), or by external managers. 

In a member-managed structure, all the members jointly take care of the company's day-to-day operations. On the other hand, in a manager-managed structure, some members or outside managers will manage things for your Alabama business. 

This differentiation is essential as it defines who has authority over decisions and assets, avoiding future arguments.

Step 4: Layout Administrative Operations

Outline how your LLC will address the company's administration, such as deciding on profit and loss allocations, preparing annual reports, holding members' meetings, assigning voting rights, and capital contributions.

Explain the processes for making financial and managerial decisions, and detail the steps to access records and other must-have documents the LLC members keep. Make sure you customize this section to fit the particular circumstances of your business, as every workplace is unique in its structure and composition.

Step 5: Add and Remove LLC Members

Lay out the steps to bring new members on board and lay off existing ones, with details on what happens in case of a buyout, indemnification, or changes to the operating agreement.

This section should also discuss how the business will handle situations where a member wants or needs out for whatever reason, whether due to illness, death, or desire to sell interest. Having a clear-cut process to reference at any point will avoid future headaches and keep operations running like clockwork.

Create Your Operating Agreement Through a Filing Service

You now know what an LLC operating agreement needs to include. Filing this agreement through Swift Filing services is easily the most affordable option amongst competitors.

Whether you haven't started your LLC yet or are simply looking to complete legal documents, we'll make sure you're covered. Starting at just $0 + state filing fees, you can file for your LLC through us today. Don't forget to include our LLC operating agreement add-on in your cart so all your documents are available from day one.

FAQs

Is an LLC operating agreement required in Alabama?

It's optional, but having an Alabama operating agreement can help avoid confusion when running your business and offer legal protection. 

How does an LLC operating agreement help protect my assets?

A comprehensive LLC operating agreement serves as a robust legal shield for this business and the personal assets of its owners. It lays out the structure of your LLC, who is responsible for what, and how to handle assets in case of any conflict or disagreement. In other words, it provides clear guidance and ensures that your hard-earned assets are protected no matter what happens.

Who needs access to an operating agreement once it's drafted?

Anyone involved with the LLC should have access to this document. Moreso, it'll be needed when opening a business bank account or getting legal advice.

How do I edit information on an operating agreement if membership changes?

If the membership roster of your business changes, you'll need to make adjustments to this document. The operating agreement should outline a protocol for any modifications. Usually, it takes a majority vote among the members, and you must officially document the amendment.

What other legal documents do I need to draft for my Alabama LLC?

If you're forming an LLC in the state of Alabama, there are several legal documents you'll need to prepare and draft. In no particular order, these documents are an operating agreement, Articles of Organization, and an Employer Identification Number (EIN) from the IRS for tax purposes. You'll also need to obtain any licenses or permits your business requires.

Bibliography

1. Justia US Law. "Section 10A-5A-1.08 - Limited liability company agreement - Scope; function; and limitations." Accessed June 23, 2023.

2. Justia US Law. "Section 10A-5-4.03 - Operating agreements." Accessed June 23, 2023.

3. Alabama Secretary of State. "Organizing Your Domestic Limited Liability Company or Registering Your Foreign Limited Liability Company." Accessed June 23, 2023.