Idaho LLC Operating Agreement: Drafting Checklist

The business formation process for a Limited Liability Company (LLC) requires you to submit several documents detailing your business structure. In Idaho, your Certificate of Organization is the most important of these documents because it ensures your business meets state law.[1]

But, many skip the LLC operating agreement, which is often vital to running your company. Creating an Idaho LLC operating agreement helps you to start an LLC with predefined rules that all members follow.

Key Takeaways

• Idaho doesn’t require your LLC to have an LLC operating agreement, but, without one, your LLC is subject to state default rules.

• An Idaho LLC operating agreement confirms your liability protection and defines your small business's processes.

• By creating an LLC operating agreement, you can gain more control over your business structure.

What Is an LLC Operating Agreement?

An LLC operating agreement is an internal legal document you use to define the rules, regulations, and ownership stakes within your business structure. It differs from an LLC Certificate of Organization, also known as Articles of Organization, because it focuses on how you run your business rather than providing details about it.

That means you have more freedom on what to include in your operating agreement. For instance, you can use the operating agreement to define who handles essential aspects of your LLC, such as your business license and employer identification number.

But perhaps the most crucial function is that it ensures your limited liability company doesn’t default to Idaho state laws. Instead, it provides a structure and rule set for managing most issues. Idaho’s laws only come into play when they supersede the rules you create for managing your LLC.

State Requirements

You’re not obligated to create an operating agreement under any Idaho statutes or the Idaho code. It’s optional. That means you don’t have to worry about submitting an operating agreement to the Idaho Secretary of State or creating one to get your business up and running.[2]

However, state law clarifies that every LLC is bound by its operating agreement should it create one. Anybody who becomes a member of an LLC with an operating agreement in place automatically consents to follow the rules laid out in the agreement as part of their membership.

LLC Operating Agreement Benefits

If you’re not legally obligated to have an operating agreement for your LLC, why create one? It’s a good question, and the answer is that your business entity benefits from having an operating agreement in several ways.

1. More Control Over Your Business Structure

The state has rules that it defaults to when treating your LLC as a legal entity if the LLC has no agreement in place. This means the state has more control over how you run your business than you do if you don’t have an operating agreement.

By putting an agreement in place, you exert more control over how you run your LLC. You define ownership stakes and create processes for what happens in various situations. Plus, you can use the operating agreement to define membership stakes in a way that ensures no conflict arises in the future.

2. Secure Your Limited Liability Status

One of the chief benefits of securing LLC status is that it offers personal liability protection to all members of the LLC. If you receive service of process, which may lead to a lawsuit, those legal proceedings apply to the business rather than any individual.

Having an operating agreement secures that limited liability status and protects your personal assets.

You define the specific ownership and membership of the LLC, providing you with a legal document to point to whenever issues occur.

3. Create a Route to Scaling

You want your business to grow, but that growth doesn’t just come from more products sold and higher profits. It often comes from adding new members or changing your ownership structure to reflect your growth.

You can set the stage for scaling with your operating agreement. It can cover everything from the specific process you follow to welcome a new member to who manages aspects of the business essential to growth, such as your Employer Identification Number (EIN) and business bank account.

Who Needs an Operating Agreement?

Given that Idaho state law doesn’t require any LLC to have a written operating agreement, the technical answer is that no business entity in the state needs one.

But the reality is that every LLC should create an operating agreement for the following reasons:

• Business owners can use an operating agreement to solidify their processes as part of LLC formation.

• Any previous owner of a sole proprietorship can use an Idaho operating agreement to confirm their liability protection.

• Businesses are protected from relying on state default rules if something happens that affects their Idaho limited liability company.

Finally, having an operating agreement allows you to create structure, which may prove crucial if you later choose incorporation or set up an S-Corp tax structure.

Drafting Your Idaho LLC Operating Agreement

You can create your written operating agreement in several ways. An LLC operating agreement template can help, especially if you get professional help to establish your LLC as a legal entity. But a template may not cover every aspect specific to your business.

The five steps below show you how to create an operating agreement and cover any interactions you’ll have with the Idaho Secretary of State while doing it.

Step 1: Provide Business Information

If you’ve already completed your Articles of Organization, you have a head start for creating an operating agreement. You already have much of the basic information for LLC formation and, thus, most of what you need to kickstart your operating agreement.

But even if you’re not that far into the LLC formation process, you only need the following basic information for your operating agreement:

• Business name

• Place of business

• LLC owners and titles

• Registered agent information

The last point is interesting because it’s not technically required in your operating agreement. However, Idaho requires your LLC to have a registered agent, whether that’s you, somebody in your business, or a third party.[3] Defining that agent in your operating agreement makes who handles your documents and service of process clear.

Step 2: List LLC Members

You have your basic information, so your next step is to create a list of all the LLC members. That list solidifies the protection each member gets from limited liability status and defines members’ ownership interests. Without it, personal liability can become a problem. 

Information to include here is as follows:

• Full names and addresses of every member of the LLC

• Member’s membership interest, usually based on financial or “sweat” contributions

• Information about any specific roles or responsibilities the member assumes

Don’t make the mistake of thinking you don’t need this list for a single-member LLC operating agreement. Even if you’re the sole member, you must include this information to protect your liability. Creating the list in the startup stage also means you’re ready to adapt if your company grows from a single-member LLC into a multi-member LLC.

Step 3: Decide Member-Managed vs Manager-Managed

The state of Idaho allows you to create either a member-managed or manager-managed LLC, giving you control over your management structure.[4] You define who handles the day-to-day running of your LLC management.

In a member-managed LLC, you or one of the members of the LLC take control of those day-to-day responsibilities. You’ll use the operating agreement to define who that member (or members) is and outline their specific role. 

Single-member LLCs often choose a member-managed structure to avoid introducing outside parties.

Third parties come into play with a manager-managed LLC. You assign somebody from outside the business to oversee your LLC, providing independent management designed to get ahead of internal conflicts. Larger LLCs often use this structure to get third-party oversight and prevent member disagreement.

Step 4: Layout Administrative Operations

The main purpose of an operating agreement beyond asserting liability protection is to define the processes you follow for administrative operations. In other words, how will your business handle various situations? 

Rules and processes you insert for administrative operations may include:

• Defining how voting rights are assigned and what they mean in the context of an internal vote

• Explaining how capital contributions, membership allocation, and distributions happen

• Assigning specific tasks to members, such as who handles your annual report, business bank account, and employer identification number

• Outlining steps for updating your business license, if you require one

• Defining how the IRS treats your business for tax purposes

You can customize this aspect of your internal document based on the processes you want to follow and your specific needs. Think of it like a checklist of everything that needs to happen to make the day-to-day running of the business as smooth as possible.

Step 5: Add and Remove LLC Members

Your LLC’s internal structure may change over time. You may welcome new members or have members who choose to leave. Those situations can create turmoil if you have no processes to determine how ownership percentages change when your ownership or membership structure changes.

Do remaining members divvy up a departed member’s ownership stake upon leaving? How do you handle member contributions and ownership changes when new members come on board? What do you do if there’s a buyout, or you pass the business on to somebody else?

You’ll answer these questions by creating your operating agreement. Again, don’t assume you don’t need these answers if you’re the sole member of your LLC. The questions will come up as soon as you welcome new members into the fold, so it helps business owners to have defined processes for how that happens in an internal document.

Create Your Operating Agreement Through a Filing Service

Whether you’re starting a small business or have a collective of business owners with a grander vision, an Idaho LLC operating agreement is necessary. Idaho state law doesn’t require one, but you need this internal document if you want to protect your members, define your processes, and make running your business easier.

Thankfully, we can guide you through the entire process to start an LLC correctly, from the Certification of Organization to the operating agreement. Since 2015, we’ve helped over 300,000 businesses with LLC formation. If you’re ready to get your LLC up and running, get in touch, and we’ll take you through the formation.

FAQs

Is an LLC operating agreement required in Idaho?

No, you don’t need to create an LLC operating agreement to transact in Idaho. If you choose not to draft one, the state applies its default rules for any legal issues about your business.

How does an LLC operating agreement help protect my assets?

LLC operating agreements define the LLC’s membership structure. It's a legal document you can point to when proving you’re protected by the business structure.

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

As an internal document, an operating agreement usually only needs to be accessed by LLC members. However, you may have to grant legal or financial professionals access if needed.

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

Most operating agreement edits require a member vote, with the amendment passing if the majority of members agree. You can use the agreement itself to define your business-specific process.

What other legal documents need to be drafted for my Idaho LLC?

You must complete and submit a Certificate of Formation before your LLC can transact in Idaho.

Bibliography

1. Idaho Secretary of State’s Office. “File Paper Forms.” Accessed June 28, 2023.

2. The Official Website of the Idaho Legislature. “Idaho Statutes: Section 30-25-106.” Accessed June 28, 2023.

3. Idaho Secretary of State’s Office. “Registered Agent Information.” Accessed June 28, 2023.

4. The Official Website of the Idaho Legislature. “Idaho Statutes: Section 30-25-407.” Accessed June 28, 2023.