Kentucky LLC Operating Agreement: Drafting Checklist

When setting up your limited liability company (LLC) in Kentucky, you must file certain documents, including the Articles of Incorporation. An LLC operating agreement is also recommended.

According to Kentucky state law, you don’t technically need to have an operating agreement for a new LLC filing. However, it’s still smart for every small business to have one. This guide will examine why operating agreements are beneficial during business formation and how to make one.

Key Takeaways

• A Kentucky LLC operating agreement is not required when setting up your LLC but is highly recommended.

• If you decide to make an LLC operating agreement, all of your LLC’s members will be bound by it.

• LLC operating agreements can offer various advantages to any business in Kentucky, such as additional liability protection and the ability to define your own rules.

What Is an LLC Operating Agreement?

An LLC operating agreement is a legal document that defines the organization of your business. This includes rules and processes your limited liability company will follow in the future, like what happens if a member leaves the business.

All of the founding members of the LLC need to agree on the terms of the operating agreement. Then, once it’s officially formed and agreed upon, all members will be bound to follow it. Therefore, it’s handy to set clear rules everyone can follow, helping avoid disagreements or disputes.

Unlike the Articles of Incorporation, an operating agreement isn’t a mandatory step of LLC formation in Kentucky. You don’t have to have one; your LLC will still be an official legal entity without one. However, it’s still wise to have one due to the many benefits it provides.

State Requirements

According to Kentucky state law, specifically KY Rev Statute 275.003, LLC owners are not required to have an operating agreement.[1] Therefore, you don’t have to make an agreement if you don’t want to, and there‘s no need to file it with the Kentucky Secretary of State.

However, although Kentucky law does not demand that LLCs create operating agreements, it still has power over how those agreements can be enforced and amended. This is outlined in the Kentucky Limited Liability Company Act.[2]

LLC Operating Agreement Benefits

Since Kentucky doesn’t force you to make an operating agreement for your LLC, you might feel there’s no need to make one. However, operating agreements offer a great range of unique benefits. Here are just three of the main advantages of creating these agreements.

Stronger Liability Protection

An LLC business entity already offers strong personal liability protection. If your business encounters any trouble, your personal assets should be safe. However, an operating agreement provides another level of security by clearly defining your role and the roles of other members throughout the business.

Future Protection Against Law Changes

State law is ever-changing, and businesses often seek legal advice to ensure that they operate fairly and legally, with all relevant business licenses, income tax filings, etc. An LLC operating agreement won’t safeguard you against legal problems. However, it will allow you to clearly set out your business’ specific rules and practices, making managing it easier.

Clear Business Plan Definition

Setting up a business is an extensive process, with many things to consider. You must plan ahead, asking questions like “Who will be in charge of the business bank account?” and “What happens if a member leaves?” An LLC operating agreement provides clear answers to all of these questions. It’s also crucial for accounting and tax purposes to lay out the financial side of your business plan.

Who Needs an Operating Agreement?

From a legal standpoint, state law in Kentucky doesn’t require an operating agreement as part of an LLC formation. Business owners can operate an LLC business entity without one. The Articles of Incorporation are the only legal documents you must file during business formation.

This is true for all sorts of businesses, from sole proprietorship LLCs to S-corp companies. However, even though there’s no obligation to have an operating agreement, they’re still strongly recommended for many types of businesses, including those in which:

• Multiple members may have different views regarding how you should run the LLC.

• The LLC members have a mixture of roles, stakes, and responsibilities which need to be clarified via an operating agreement.

• The company wants to avoid following state default rules and would prefer to implement its own rules and practices.

• The members want a single legal document that clearly outlines the LLC’s operations, from their official place of business to how they deal with member losses.

Drafting Your Kentucky LLC Operating Agreement

If you’ve decided that a written operating agreement is the right choice for your Kentucky business, you’ll want to know how to make one. Given that this is a legal document, it has to be created with great care and attention to detail.

It may not need to be filed with the Secretary of State or sent to their P.O. box, and there’s no filing fee to pay, either. However, mistakes in your operating agreement could lead to disastrous consequences for your business in the future.

Many business owners seek legal advice or fill in an LLC operating agreement template. If you choose not to draft your agreement with a template and prefer to write it yourself, here are the five key steps to follow.

Step 1: Provide Business Information

The first step when making your LLC operating agreement is to provide some basic information about the business, such as your LLC name and registered office address. A lot of this information is also found in the Articles of Incorporation. Here is what you’ll need to include:

• Your Kentucky business name and place of business

• Information on the registered agent you chose during your LLC formation

• Details on the purpose and activities of the business

• Information regarding the LLC’s members, although we’ll expand on this in the next step

 The requirements may vary slightly for specific LLC types, like a foreign LLC.

Step 2: List LLC Members

With the basic information provided, the next step involves listing and detailing the LLC members. If you only have a single-member LLC, this can be completed relatively quickly but will take longer for a multi-member LLC.

The reason for making this list is to confirm the business’s ownership structure and the various roles and member contributions of the business owners. It can also help detail ownership percentages and voting rights among the LLC owners.

For each member, you should provide the following information:

• Title, name, and address

• Details regarding members’ ownership or membership interest

• Information on any contributions made by that member

• A statement about the member’s role and responsibility within the business

Ensuring all elements are included is vital, especially regarding ownership interest and responsibilities. This helps to protect the personal liability and personal assets of each member or new assignee who may join the company or startup as it grows.

Step 3: Decide Member-managed vs Manager-managed

The next step is to decide on the day-to-day management structure of your LLC. There are two choices for LLC management: member-managed or manager-managed.

A member-managed business is one in which the LLC members are responsible for managing everything, ensuring that all rules are followed and that they adhere to the operating agreement. Many single-member LLC owners opt for this choice, giving them total control over how the business is run.

In a manager-managed LLC, you can bring a separate person (not a member) to take on the management role. This is someone who doesn’t have the same powers or voting rights as a member but is given control over how the business operates. Larger LLCs often favor this setup because of their many members.

Step 4: Lay Out Administrative Operations

With the day-to-day management sorted out, you can move on to detail how the business and its members will respond in certain situations. This is one of the most critical parts of the whole document.

One of the main reasons to create an operating agreement is to have a clear internal document to consult when various situations arise. It covers voting rights, allocation of profits, and much more.

Here are the main aspects you’ll need to include:

• Voting rights for each member of the LLC based on capital contributions

• Rules on the general operations of your startup and how you might customize or amend your business plan in the future

• Details on the distributions of profits and allocation of losses among the members

• Members’ responsibilities regarding the financial side of the business, covering things like the business bank account, IRS tax returns, annual report filing, indemnification, etc

Depending on the nature of your business, there may be other specific needs to cover in this section, but the list above shows the primary information to include.

Step 5: Add and Remove LLC Members

What might happen if new members join your business in the future? Or if existing members of an LLC decide to leave? Again, the operating agreement is a crucial internal document that clearly explains what happens in the case of changes to the list of business owners.

You’ll need to establish a process for what occurs if a member leaves the company. This should include how their ownership percentages and member contributions are divided among the remaining members, any possibility of a share buyout for the other LLC owners, indemnification, etc.

It’s also essential to consider what will happen if a new member joins. Consider what level of voting rights a new member will have and what level of membership interest they can obtain upon entering the company. Even if you’re operating a single-member LLC, this is still relevant, as your business may gain one or more new members in the future as it grows and evolves.

Create Your Operating Agreement Through a Filing Service

Business owners often need clarification or even help setting up an operating agreement by themselves. There are so many other aspects involved with LLC filing that you may struggle to find time to create this document with the attention and care it requires. Swyft Filings can help with this.

If you’re looking for the next step after forming your LLC, our LLC operating agreement service ensures you have a compliant document for conducting business in Kentucky. 

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.

FAQs

Is an LLC Operating Agreement required in Kentucky?

No, having an operating agreement in Kentucky is not a legal obligation. It’s still wise to create the internal document for the many benefits it can bring to your business.

How does an LLC Operating Agreement help protect my assets?

An operating agreement officially designates you as an LLC owner or member, giving you all the liability protection that comes along with that, including protection of personal assets.

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

LLC members and owners will need access to the operating agreement. It may also need to be looked at by legal professionals, financial service providers, or potential investors in the future.

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

All members must agree upon all edits or amendments to an operating agreement. This may involve a meeting to outline the possible changes and a voting process among the members to sign off on the new document.

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

You’ll need to file the Articles of Organization to the Kentucky Secretary of State office, as well as submit an annual report.[3]

Bibliography

1. Kentucky General Assembly. “Kentucky State Legislature Statute 257.003” Accessed June 22, 2023.

2. Kentucky General Assembly. “Kentucky Revised Statutes KRS Chapter 275” Accessed June 22, 2023.

3. Kentucky Secretary of State. “Business Filings Information.” Accessed June 22, 2023.