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You’ll draft several documents when you start an LLC, many of which state law requires. Your limited liability company needs your Articles of Organization delivered directly to the Secretary of State as the basis of business formation.
But there’s one document that many prospective small business owners overlook. An LLC operating agreement isn’t legally required in Indiana, but it’s a valuable legal document to have for the oversight of your company. Let’s explore how to create one and why drafting an operating agreement is vital to LLC business formation.
The state of Indiana doesn’t require you to have an LLC operating agreement in place before you start your small business.
Your LLC benefits from an operating agreement through the solidification of liability protection and by creating a management structure within the company.
A good operating agreement includes basic information about your business, its members, its management, and the processes you follow for various circumstances.
Don’t be forced to operate under default state guidelines that don’t fit your business. Shield your assets and set your own rules for your LLC with a proper Operating Agreement.
Every limited liability company has ownership and membership structures, with those structures requiring oversight. Furthermore, your LLC likely has specific rules and regulations related to the responsibilities of each member and how you run the business.
An LLC operating agreement allows you to solidify that information in a legal document under which all LLC owners and members are bound.
Unlike your Articles of Organization, it’s an internal document you create alongside the other members of your LLC. Through it, you’ll define ownership percentages, responsibilities, and the rules under which you govern your LLC. It’s not required for LLC formation, but it’s beneficial to prevent conflict in your organization.
Indiana law doesn’t require you to have an Indiana LLC operating agreement. However, the Indiana Secretary of State recommends that you have one, regardless of the specifics of state law.
Without one, conflicts and issues related to your business get handled under Indiana law. This approach erodes much of your ownership control, one of the main benefits of forming an LLC. If you have an operating agreement, it’s the default document used to determine solutions to conflicts. Indiana law only comes into play if the issue you face extends beyond the agreement’s scope.
Given that you aren’t legally required to create an LLC operating agreement for your business entity, you may wonder why you should put time and effort into it. After all, an operating agreement isn’t simple to create. In addition to agreeing on what it should contain with your LLC’s members, you may also need to seek legal advice to make it.
That work is worthwhile because it delivers three key benefits to your company.
The personal liability protection that comes with the LLC business entity is one of the main reasons to create one. Compare it to a partnership or sole proprietorship, and you see that an LLC acts as a buffer between you and legal issues and costs that may arise within your business.
In short, having an LLC means you’re less likely to face personal liability if somebody sues or otherwise aims to make a claim against your business.
An LLC operating agreement solidifies these legal protections. It documents each LLC owner and member, confirming that they are subject to the liability protection this business structure offers.
Many of your LLC members have a claim to an ownership stake in the business, earned either through sweat equity or the money they invest directly. You need to keep track of these stakes. Your LLC operating agreement does this by documenting who does what and what they own.
Furthermore, you can use the document to outline each member’s responsibilities as part of the business. For instance, you may have a member responsible for operating the company’s business bank account and another who handles income tax and other documents for tax purposes.
Your LLC operating agreement confirms these roles and responsibilities and acts as a legal document used to settle related internal disputes.
Beyond defining entitlements for your current LLC owners and members, an LLC operating agreement helps you look to the future. You can use it to determine what happens to ownership stakes when new investors come on board. Again, the document resolves conflict before it arrives, setting a legally enforceable precedent within your LLC.
Similarly, you can use the agreement to define what happens if a member leaves, how you’ll approach the sale or merging of the business, and a succession protocol.
Given that Indiana law does not require an operating agreement, no LLC technically HAS to have an operating agreement to transact within the state. Drafting one is still highly recommended for all of the following business owners:
LLC owners who wish to solidify their personal liability protection to ensure they’re not treated like the owners of a sole proprietorship in disputes
Any business owners who don’t want to operate under state default rules if any issue arises concerning their business
Prospective S-Corp owners who want to set the stage for incorporation of their business under a new tax structure
All who wish to document the ownership structure of their business entity to ensure fewer disputes later on
Ultimately, anybody involved in LLC formation benefits from creating an operating agreement. Even though it’s not required by state law, the document’s legal standing makes it helpful in many situations.
You’ve decided you want to create a written operating agreement. You don’t have to submit the resulting document to the Indiana Secretary of State, which means no filing fee. However, you may have to seek legal advice or work from an LLC operating agreement template to get the particulars correct.
Alternatively, you could create this legal document using Swyft Filings’ LLC operating agreement service. No matter what route you choose, here are the decisions you must make for your business to include in this internal document:
If you’ve already completed your LLC’s Articles of Organization, the basic information needed for an operating agreement is straightforward. Most of what you wrote in your formation documents can be transferred directly to the operating agreement.
If you’re not that deep into the LLC formation process yet, the following is helpful information to add about your Indiana business:
Your business name or LLC name
An office address tied to the name of the company
Information about what you do and the industry you serve
Some also choose to add the registered office of their registered agent, who handles the service of process, and similar correspondence, for their business. Indiana law requires you to have a registered agent, whom you’ll define in your Articles of Organization.
Listing your LLC members serves several valuable purposes, including:
Outlining member contributions and the ownership percentages that result from those contributions.
Ensuring each company member receives protection for their personal assets that an operating agreement provides.
Confirming all members of a multi-member LLC and their membership interest in their roles and responsibilities.
This list is crucial if you have several members of an LLC. It’s also vital in a single-member operating agreement. Without this list, your single-member LLC may resemble a sole proprietorship too closely. In other words, you haven’t solidified the personal liability protection an LLC provides for yourself.
So, even if you’re operating independently, outline each member in the LLC, their ownership or membership interest, and their member contributions. Doing so gives you irrefutable evidence to prove you (and your members) are part of your LLC.
With your list of members complete, hone in on the management structure of your business. You can conduct LLC management in two ways in Indiana.
The first is a member-managed LLC, the most common structure in a single-member LLC. This denotes that the member elected to the management role commits to handling the day-to-day needs of the business, such as ensuring all members follow the rules and regulations in the operating agreement.
As your LLC grows, or if you start with many members, you may appreciate independent management ahead of member management. This is where a manager-managed LLC structure comes into play. You select an independent individual or organization to implement your operating agreement’s rules for day-to-day management.
The latter option often reduces internal conflict as you have an independent overseer who manages the essential aspects of your business. However, the former gives you more control. Decide which is most important to you and document your chosen management structure in your operating agreement.
With day-to-day management oversight secured, it’s time to dig into your LLC members’ specific roles. You’ll also use this step to outline basic administrative operations for your business. Examples of what to include here are:
Determining who’s responsible for securing and managing your Employer Identification Number (EIN) from the Internal Revenue Service (IRS)
Setting out a process to follow when amendments to your operating agreement are proposed for specific needs
Deciding who’ll handle issues like capital contributions, indemnification, and distributions of funds to your members and business bank account
Outlining the voting rights of each member based on their contributions to the LLC
In short, you use this step to define the company’s primary operating procedures as part of an internal document to which you can refer when needed. Focusing on administrative operations is especially important for a startup, which may undergo multiple evolutions as it scales.
Change is an inevitability in every business venture. New members come on board, old members leave, and other issues, such as buyouts, mergers, and dissolution, can affect the business.
You need processes to handle all these potential issues in your operating agreement. Specifically, the document should contain the following:
A process the business owners can follow to welcome new members of an LLC
Information about how ownership percentages are handled in the case of new members joining or old members departing
Decisions regarding how member contributions may change depending on various circumstances, such as new investors coming on board
A voting process to follow that includes all members of the company when determining if amendments need to be added to your operating agreement
Don’t assume you won’t require this information if you have a single-member LLC. Assuming you wish to grow, you’ll eventually welcome new members. You need processes to handle that eventuality, just as multi-member LLCs have.
Creating an LLC operating agreement is no simple feat. Business owners have a lot of work to do to ensure the document complies with Indiana state law and covers all of their LLC’s requirements.
If you want to start an LLC, you may need some help.
Swyft Filings provides that help with a full-service LLC formation process that covers everything from creating your operating agreement to filing your Articles of Organization. We’ve helped over 300,000 businesses get their start, with our prices starting from $0 (plus state fees). Get in touch today if you want to start an LLC the right way with Swyft Filings.
Set Your Own Rules: An operating agreement is your company’s founding document. Govern your business by your own guidelines, not the state’s.
Resolve Disputes: Set a binding agreement about the fundamentals of your business, covering ownership, rights, and responsibilities.
Protect Your LLC Status: Put a barrier between your personal assets and business liabilities.
The state of Indiana doesn’t require LLCs to have an operating agreement, though it recommends creating one.
LLC operating agreements define the members and owners of an LLC. In doing so, they confirm the individuals who receive liability protection from the LLC structure.
All owners and members of your LLC need access to your operating agreement, as does any manager you bring on board if you have a manager-managed structure. There are also times when legal and financial specialists may request access.
You’ll outline a process for amending your operating agreement in the document itself. Typically, the process involves putting the proposed amendment to a vote with all owners and members with ownership stakes participating. After deciding on any changes, you’ll have all members officially sign off on them.
Beyond your operating agreement, your Articles of Organization are essential to forming your LLC. You submit this document to the Indiana Secretary of State before conducting business.
Indiana Secretary of State. “Business Forms.” Accessed June 22, 2023.
Indiana Secretary of State. “An Entrepreneurs Guide to Starting a Business in Indiana.” Accessed June 22, 2023.
Indiana Secretary of State. “What is a Registered Agent and Why Do I Need One?” Accessed June 22, 2023.
No matter the business type, Swyft Filings can help you form your new company.