Hawaii LLC Operating Agreement: Drafting Checklist

If you’re forming a limited liability company, you should hand in the necessary documents as soon as possible to avoid legal issues. Besides your Articles of Organization, do you need a Hawaii LLC operating agreement?

That’s precisely what you’ll find out in this article. We’ll cover whether any Hawaii state law mandates the document and what purpose it serves for your small business.

Key Takeaways

• A Hawaii LLC operating agreement isn’t required for your LLC, but drafting one is recommended for every small business owner.

• Operating agreements generally include basic company information, members’ responsibilities, capital contributions, voting rights, and the management structure.

• An operating agreement helps eliminate the risk of personal liability and ensures each member understands their role from day one.

What Is an LLC Operating Agreement?

A limited liability company operating agreement is a legal document that offers key information about how you’ll manage your LLC. It also details the members, ownership percentages, responsibilities, and procedures for critical decisions, such as taking out loans and adding or removing members.

You’ll need to include much of the same information as in your Articles of Organization in your operating agreement, such as:

• Business name

• Place of LLC formation

• Employer Identification Number (EIN)

• Registered agent information

State Requirements

Are you required to enter into an operating agreement in the state of Hawaii? The short answer is no. Neither the Hawaii Department of Commerce and Consumer Affairs nor any other body mandates you to have this document.[1] In other words, you won’t violate any state law if you don’t create this internal document.

However, setting up a Hawaii LLC with an operating agreement is one of the best decisions you can make as the owner.

The biggest reason is that this document lets you avoid default state rules. Without an operating agreement, the state uses the Uniform Limited Liability Company Act to govern your enterprise. It doesn’t consider the specifics of your entity, which can cause a world of trouble down the line.[2]

LLC Operating Agreement Benefits

Here are some of the most significant perks of having an operating agreement.

Protecting Your Limited Liability Status

Tax flexibility might be one of the most essential aspects that might make you start or want to start an LLC. For example, your LLC can choose how it wants to be taxed and prepare tax returns. You can do so as a partnership, corporation, or S corporation, giving you virtually unlimited freedom.

But the LLC status may be an even stronger selling point. It separates your personal and the property of your business entity, meaning you’re not liable for your organization's expenditures. For instance, if you lose a lawsuit and have to pay a settlement, it doesn’t come out of your pocket. Only your LLC’s finances are considered.

The only way to prove and protect your LLC status is to draft an operating agreement. It shows your personal property has nothing to do with enterprise funds, giving you peace of mind in the event of litigation.

Avoiding Default State Rules

The Hawaii Uniform Limited Liability Company Act addresses various points of operating agreements, like members’ right to information and LLC management.[3] That said, the document is general and doesn’t consider the intricacies of each business entity.

That’s why you don’t want these default rules to apply to your enterprise. For example, they may require you to run your company through managers and not through your members directly. This might go against your vision and can make your organization less efficient.

The easiest way to avoid these default provisions is to enter into an operating agreement. It shouldn’t take long to provide the necessary information in your document, especially if you’re a single-member LLC. Best of all, you can draft the document at any point in your business.

Underpinning Your Business Plan

Chances are, you’ve outlined how you go about various enterprise operations in your business plan. Depending on your management structure, you can use your operating agreement to delegate those responsibilities to your managers or members. 

Some of the duties you can add to this document include:

• Who opens your business bank account

• How and in what circumstances are sensitive company records disclosed

• What institution will provide a company credit card, and how will you use it

• Who’s responsible for negotiating and taking out loans

Who Needs an Operating Agreement?

Considering all the benefits an operating agreement delivers to a Hawaii LLC, you might wonder: “Who doesn’t need an operating agreement?” Drafting it is one of the most critical stages of your LLC formation. It bolsters legal protection for your business entity and helps you get off on the right foot.

Entering into an operating agreement makes sense for many business owners who want to:

• Transfer their LLC to a sole proprietorship and retain the same division of duties

• Avoid state default rules applying to their enterprise

• Pave the way for an S corp incorporation by creating a solid internal structure with a legal document

Drafting Your Hawaii LLC Operating Agreement

Now that there’s no more doubt as to whether or not you should have a Hawaii LLC operating agreement, it’s time to see what goes into drafting this legal document.

The Hawaii Department of Commerce and Consumer Affairs Business Registration Division won’t provide a Hawaii operating agreement template. However, online LLC operating agreement templates are available from many other sources. These usually come with a registration or filing fee.

Another option is to draft the internal document from scratch. Whatever route you take, your written operating agreement's drafting process should look like this.

Step 1: Provide Business Information

The first step of creating an operating agreement is like drafting your Articles of Organization. You provide basic information about your enterprise, including your LLC name and address.

Here’s a detailed overview of the basic details you should have about your Hawaii limited liability company:

• Business name: Write the full name of your organization, including the LLC designation (limited liability company, limited company, LLC, or LC).

• Place of business: State your business address, which should be a physical street address in Honolulu or elsewhere; a P.O. box is prohibited.

• Employer Identification Number (EIN): Provide the number you use to pay federal and state taxes. If you don’t have one, you can apply for the number with the IRS.[4]

• Registered agent: Mention the business entity or person who accepts your service of process, annual report reminders, tax documents, and other critical papers, as well as their registered office.[5]

Step 2: List Your Hawaii LLC Members

After introducing your company, you now need to provide key information about you and all other members of an LLC. Whether you have a single- or multi-member LLC is irrelevant. This section is pivotal, as it helps reaffirm your status and guarantee personal liability protection.

Make sure to include the following:

• Ownership interest (membership interest) of all business owners

• Member contributions

• Voting rights for each startup member according to ownership percentages

Step 3: Decide Member-Managed vs Manager-Managed

In this part, decide whether you want managers or members to manage your company. Consider the pros and cons of each management structure to make the right call:

Member-Managed LLC

Manager-Managed LLC

Step 4: Layout Administrative Operations

You also need to determine who does what in your enterprise. Several factors can help you customize members’ schedules here, but most organizations use capital contributions. For example, the greater your contributions and voting rights, the higher your involvement is in strategic processes.

Whatever method you choose for duty divisions, make sure the following responsibilities are assigned in your internal document:

• Who’s in charge of profit allocation

• Who opens and manages your business bank account

• Who oversees your business plan fulfillment according to your specific needs

• Who’s responsible for annual report filings

• Who communicates with the IRS for Employer Identification Number (EIN) filing

• Who performs day-to-day operations

Step 5: Add and Remove Members

Lastly, don’t forget to describe the process of adding and removing members:

• How are new members brought on board?

• What’s the new business owners' membership interest (member contributions)?

• How does adding or removing a member affect the ownership percentages of the remaining or current members?

• How do you handle buyout and indemnification payments?

Create Your Operating Agreement Through a Filing Service

Knowing what it takes to draft a Hawaii LLC operating agreement is one thing, but you need to be extra careful to include every key detail to stay compliant with the state law and start an LLC the right way. Doing so while juggling other formation aspects is difficult, but Swyft Filings is here to save the day. 

We offer our services to all business owners who need a detailed operating agreement. Give us a call or visit our website to get started with our operating agreement package. We’ll handle all the drafting, giving you more time for exciting business aspects.

FAQs

Is an LLC operating agreement required in Hawaii?

No. Hawaii does not require an operating agreement. Still, business owners who want to make the most of their LLC should enter into one. Besides personal asset protection, it also helps divide responsibilities among members or managers.

How does an LLC operating agreement help protect my assets?

An LLC operating agreement can help protect your private assets by proving your limited liability status. Various parts of this document verify you truly are an LLC and not some other organization. This way, third parties can’t claim your personal funds in case of lawsuits.

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

Each member of your organization should be able to access your operating agreement once it’s drafted. You must also grant access to your managers if you’ve mentioned them in your internal document. Courts and other third parties generally only require the document in some instances, such as when determining whether or not you’re an LLC.

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

Whenever you want to amend your internal document, you must draft a new one reflecting the updated membership structure. From there, make sure every member signs the operating agreement to make it legally binding.

What other legal documents do I need drafted for my Hawaii LLC?

The only other document you need to draft for your Hawaii LLC is your articles of organization. Without it, you won’t be able to register your enterprise. Also, don’t forget to apply for your employer identification number with the IRS.

Bibliography

1. U.S. SEC. “Operating Agreement of Cash Central Hawaii.” Accessed June 29, 2023.

2. U.S. SBA. “Basic Information About Operating Agreements.” Accessed June 29, 2023.

3. Hawaii State Legislature. “Chapter 428 – Uniform Limited Liability Company Act. “Accessed June 29, 2023.

4. IRS. “How to Apply for an EIN.” Accessed June 29, 2023.

5. DCCA Hawaii. “What Is a Registered Agent?” Accessed June 29, 2023.