Illinois LLC Operating Agreement: Drafting Checklist

Setting up your limited liability company in Illinois requires specific documentation. Namely, potential business owners must complete and submit LLC-5.5 Articles of Organization to the Illinois Secretary of State.[1]

Once your LLC is filed and complies with state law, you can move on to drafting your very own LLC operating agreement. This document is crucial because it outlines your business’s regulations and provisions. You’ll benefit from preparing one while setting up your business early; however, it’s still possible to do so later.

Key Takeaways

• Providing specific information in your LLC operating agreement — This section includes the definition of an operating agreement, state requirements for filing one, who needs one, and some of the main benefits.

• Drafting an operating agreement for your LLC — An operating agreement process includes relevant information about your business, how management works, and your critical day-to-day operations.

• Using a filing service to draft an operating agreement conveniently — It’s easy to lose time on paperwork and filing. Instead, business owners can opt for a filing service to get the job done.

What Is an LLC Operating Agreement?

An LLC operating agreement is an official document clearly outlining your LLC’s regulations, rules, and provisions. Business owners can draft these documents to best suit them and their business. It’s an essential legal document because it clearly defines the internal operations of your business.

After drafting this document, it becomes legally binding once your limited liability company members sign it. 

State Requirements

You must meet specific conditions to form an operating agreement in Illinois. Namely, it has to comply with the Illinois Limited Liability Company Act issued by the Illinois Secretary of State.[2] Your LLC also must be filed with the Secretary of State. This is because drafting the document will require official information about your LLC.

Some of the information you’ll need includes the following:

• LLC name — You should have a distinguishable name approved by the Secretary of State of Illinois if you wish to create an operating agreement.

• LLC member names — Define each member within the document.

• LLC’s business purpose — Get specific with what you intend to do with your LLC.

• Registered agent information — Designate a person who is supposed to obtain legal documents for your business.

You can start drafting the operating agreement as you gather this information to operate with state law.

LLC Operating Agreement Benefits

Many future owners might wonder why LLC operating agreements are crucial for their business. Here are just some ways such a document can help:

• Defines and protects your business entity’s limited liability status — With the proper operating agreement, you can protect yourself and your members from personal liability connected to the LLC.

• Lays out specific rules for your business entity instead of state default rules — Once you file an LLC with the Secretary of State, it will treat it with default state rules. Instead, you can clearly define and manage your business operations when you draft the agreement with the right legal advice.

• Clarifies a business plan and agreements between members — An operating agreement will specify a business plan and any member agreements. Having previously verbal agreements in writing reduces the risk of conflicts between members.

Who Needs an Operating Agreement?

An operating agreement is an essential document for LLCs. While it is not necessarily required, it is still highly encouraged for LLC formation. This is because it shields your business entity legally, protecting it from falling under state default rules.[3]

Some of the business formations that need a business operating agreement in Illinois include the following:

• Any LLC in Illinois — Business Agreements are most beneficial for anyone starting an LLC.

• Both member-managed and manager-managed LLCs — These formation types are vital to operating agreements, and LLCs with either structure will need the document.

• Businesses of various sizes — Small or large organizations need an LLC operating agreement. Size is not a determining factor, and organizations should clearly draft their regulations, rules, and agreements.

The necessity of business operation agreements can also depend on the jurisdiction. While Illinois does not legally bind owners to make this document, the states of New York, California, and Missouri do.

Drafting Your Illinois LLC Operating Agreement

Now that you know how vital an LLC operating agreement is, you must examine what you need to make one closely. It’s good practice to obtain legal advice before drafting one. Here are a few things that you’ll need to write the operating agreement:

• Articles of Organization

• LLC basic information

• A template to form the basis for your operating agreement

Some business owners choose to draw out their operating agreements from scratch instead of using templates. However, this can take time and complicate the process.

Step 1: Provide Business Information

Your primary business legal information is the first thing you’ll need for filing an LLC operating agreement.

Some of the specific things you’ll need include:

• Company name

• Place of business

• Principal place of business

• Registered agent

• Employer identification number

It’s important to have documents containing the information above readily available. We recommend collecting information even before filing your LLC. That way, you’ll lose less time while drafting the document.

Step 2: List LLC Members

Business owners should also include information regarding the company members. Every person involved in the process of formation should be listed. Drafting the agreement also includes clearly defining their roles and responsibilities within the LLC.

You can use this section to add responsibilities such as voting rights, member contributions, and ownership percentages. If you are the only owner, the agreement will define your entity as a single-member LLC instead of a multi-member one.

Each company member will also receive protection from personal liability, meaning their assets will be intact in emergencies such as bankruptcy. As a business owner, you must discuss and state membership interests to account for their financial stakes within the LLC.

For any operating agreement to be complete, owners should also define the company’s affairs and how they conduct business.

Step 3: Decide Member-managed vs Manager-managed

Another crucial aspect of any LLC operating agreement is deciding the company’s management structure. You must outline the LLC management in the agreement for any multi-member LLC. The two primary structures are:

• Member-managed — This LLC management means that all members are proactive in making decisions for the day-to-day operations of the LLC. This will tie into voting rights, as well as member responsibilities.

• Manager-managed — In this structure, the members appoint one or more managers to manage the company’s decisions. You’ll see this with larger LLCS when the company’s management requires more people than the original members.

However, suppose you’re the only one in your business, and it counts as a single-member LLC. In that case, this constitutes a member-managed business structure by default. However, you can still appoint someone else to manage your everyday operations.

Step 4: Lay Out Administrative Operations

Some specific processes and situations appear within every business or startup. To ensure you’re not blindsided, you’ll need to outline an effective strategy for dealing with them. This will ensure that each member is on the same page and standardize operations. 

Business owners should create a business plan that they can customize to the specific needs of the members within this internal document. Some of these defined activities include:

• Capital contributions — This refers to members’ financial contributions to fund the company’s affairs. You must clearly specify these financial contributions and their implications for responsibilities such as voting rights (see below).

• Voting Rights — Making decisions is another vital aspect of any business. However, doing so requires specific voting rights shared among the members. This will help you to avoid any confusion while carrying out daily operations.

• Allocations — You should state the financial outcomes, such as the distribution of profits and losses among members of your LLC.

• Business bank account — At this point, it would be best to agree on details of a bank account for your business as you’ll need to file annual reports with the IRS.

Step 5: Add and Remove LLC Members

Once you’ve finished the steps above, your LLC operating agreement draft is almost complete. You’ll also need to define how members can be added or removed from the agreement. This can be valuable for single-member LLCs that need to add members later and even adjust ownership percentages.

For example, such amendments might be required after a buyout. When a member leaves, you must specify how membership interests, contributions, and voting rights function for the remaining members.

Business owners should ensure the internal document reflects these changes when adding new members. You’ll also need to define indemnification rules for members of an LLC. After introducing a new member, consider how this affects the administrative operations of other company members. Once you make the amendments, have all members sign to finalize the document.

Create Your Operating Agreement Through a Filing Service

An LLC operating agreement is essential for business owners to protect their LLCs and members. However, the process requires significant documentation and can be inconvenient and time-consuming. Just collecting the necessary information will take a considerable amount of time.

For the next step after forming your LLC, our LLC operating agreement service ensures you have a compliant document for conducting business in Illinois. 

Start your business off on the right foot. File for your LLC through us today and include our LLC operating agreement add-on in your cart to ensure all your necessary documents are completed at the beginning. Swyft Filings is the cheapest service that can handle all your LLC filing needs while giving you the time to start building your business.

FAQs

Is an LLC Operating Agreement required in Illinois?

Technically, an LLC operating agreement is not required in Illinois. However, it is greatly encouraged. This is because it shields your business legally from falling under default state laws. It also clarifies agreements between members.

How does an LLC Operating Agreement help protect my assets?

Forming an LLC operating agreement protects your assets because no one can find you personally liable. It distinguishes you from the LLC as a legal entity. This means you won’t be able to be sued for your assets, such as vehicles, houses, real estate, stocks, and investments.

Who needs access to this document once it’s drafted?

Technically, an LLC operating agreement is a private document. Once notarized, you should make sure your members have access to it. It does not have to be filed with the Secretary of State.

How do I edit information on this document if membership changes?

If specific changes in your LLC occur, such as membership, you’ll need to draft a new operating agreement with the amendment. Once complete, the members should sign it and get it notarized.

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

There are multiple documents future business owners need to form an LLC. These include tax registrations, business licenses, and initial and annual reports. However, filing the LLC itself requires the Articles of Organization LLC 5.5.

Bibliography

1. Illinois Secretary of State. "Publications c3ff PDF." Accessed June 19, 2023.

2. Illinois Secretary of State. "How do I start a business.” Accessed June 19, 2023.

3. Illinois General Assembly. “BUSINESS ORGANIZATIONS (805 ILCS 180/) Limited Liability Company Act.” Accessed June 19, 2023.