Creating an LLC operating agreement is a good idea when setting up a limited liability company (LLC) in Maryland. Unlike Articles of Incorporation, this document isn’t required by state law but is still strongly recommended.
An operating agreement provides multiple benefits, setting clear rules for your company and reinforcing your small business’s personal liability protections. This guide will explain how and why you should create an operating agreement as part of your business formation.
Key Takeaways
Maryland state law does not require you to have an LLC operating agreement.
If you choose to make an operating agreement, all members of your LLC will be bound by it and have to follow its rules and practices.
An LLC operating agreement provides plenty of benefits for any small business, including additional liability protections and clear guidelines for your business operations.
What Is an LLC Operating Agreement?
An operating agreement is a legal document that defines your LLC owners' and members' roles, responsibilities, and ownership positions. It also outlines clear rules for everyone to follow when a member leaves the company.
Unlike the Articles of Organization, which is a mandatory document for LLC formation, and the Employer Identification Number (EIN) needed for almost every limited liability company, you don’t technically have to make an operating agreement. However, creating one is strongly recommended, as it offers several benefits, detailed below.
State Requirements
According to Maryland law, you don’t need to have an operating agreement. Specifically, section 4A-402 of the Maryland Limited Liability Company Act states that LLCs may enter into these agreements but does not require them to do so.[1]
It's perfectly possible to operate an LLC in the State of Maryland without an operating agreement. You won’t be contravening state law, nor will you need to worry about filing this document with the State Department of Assessments and Taxation if you choose to make it.
However, even though Maryland’s law doesn’t mandate the creation of an operating agreement, it does have guidelines about how it should be created and enforced. It states that operating agreements must not be inconsistent with the Articles of Organization.[2]
LLC Operating Agreement Benefits
Even though having an operating agreement for your Maryland LLC is not mandatory, it’s still worth making one. These agreements offer unique benefits, helping your company operate more smoothly and effectively. Here are some of the main advantages.
Confirming Your Liability Status
A great thing about an LLC business entity is that it provides personal liability protection to all members and owners. This effectively means that even if your LLC encounters legal or financial troubles, your personal assets will be safe. Having an operating agreement is a great way to solidify those liability protections, as it defines the precise roles of every LLC member.
Keeping Members on the Same Page
As time passes, various situations may arise that could lead to disputes or disagreements among your LLC’s members. For example, there may be a disagreement on aspects of the business plan or handling of the business bank account. An operating agreement prevents those kinds of disputes, setting out rules and guidelines to keep everyone on the same page.
Future-proofing Your LLC
Your company must follow the state’s default laws without an operating agreement. Those laws can change suddenly, forcing you to seek legal advice to ensure you operate legally. An operating agreement won’t exempt you from state laws, but it does help to future-proof against sudden changes by establishing your business’ rules.
Who Needs an Operating Agreement?
Technically, an operating agreement isn’t necessary for LLC formation in Maryland. It’s not like Articles of Incorporation; no part of state law forces business owners to make one during business formation.
However, even though there’s no legal need for an operating agreement in Maryland default rules, having one is still recommended. This applies to various kinds of Maryland limited liability companies, including sole S-corps and foreign LLCs.
You should strongly consider an operating agreement if:
Your business entity has multiple members or owners with varying opinions about how the company should be run.
Your LLC’s owners have various ownership levels and responsibilities that must be clearly written down and defined.
You wish to have the smoothest operations at your place of business, avoiding unnecessary disputes and disagreements among the members.
You want to avoid submitting to state default rules if and when any disputes arise.
You want to have clear practices for situations such as a member leaving the LLC.
Drafting Your Maryland LLC Operating Agreement
To proceed with a Maryland operating agreement, you must create this document carefully. It doesn’t have to be filed with the Maryland Secretary of State via Maryland Business Express or the Department of Assessments and Taxation in Baltimore, and there’s no filing fee to pay. However, it’s still a legal document.
As such, it needs to include all relevant information and comply with laws in the state of Maryland. Then, once complete and agreed upon by all members, you should keep it safe so you can consult it.
You can create a written operating agreement from scratch, which may involve seeking legal advice to ensure you don’t make mistakes. Or you can make use of an LLC operating agreement template. Using a template can be convenient, but it’s not for everyone. If you prefer to make the agreement yourself, here are the five steps to follow.
Step 1: Provide Business Information
The first step is simply providing basic information about your LLC, such as the name and address. You will likely have already done this when filing your Articles of Organization as part of your LLC formation. So you can refer to that document to help with this section.
The following information should be included:
Maryland business name
Details about your place of business
Registered agent information, including their name and address
Details about the purpose and activities of your LLC
LLC owners information
This applies no matter what kind of LLC you’re forming, from a simple single-member LLC to a multi-member foreign LLC.
Step 2: List LLC Members
Next, you’ll need to provide a full, detailed list of all business owners, covering aspects like ownership interest, member contributions, and voting powers for each LLC owner or member. This is most relevant for members of an LLC, which is a multi-member LLC, but even if you have a single-member LLC, this step is still necessary.
By listing all members, you can solidify the personal liability protections afforded to them by the LLC. This will safeguard their personal assets in case of any future legal troubles for the business. So, whether you have a small startup, sole proprietorship, or relatively large multi-member company, it’s worth doing.
Here is all the information to include:
Names and addresses of each LLC owner
Details regarding members’ ownership percentages or membership interest
Information regarding the members’ contributions and entitlements
Roles, responsibilities, and voting rights of each member
Step 3: Decide Member-Managed vs. Manager-Managed
You also need to outline the day-to-day management structure of your business, deciding if it will be member-managed or manager-managed. This is a big choice, as LLC management will significantly impact your business's success and how well it operates each day.
A member-managed business is one in which one of the members is given the role of managing the company. This is quite a common choice for a single-member LLC, but it can also work with multi-member companies if one member has a strong management background.
A manager-managed business, meanwhile, is one in which an outside, independent manager is brought in. The manager won’t have the same powers and voting rights as the members, and it will be their job to ensure that the business is managed according to the vision and rules outlined in the operating agreement.
Step 4: Layout Administrative Operations
The next step is to outline clear rules and processes for handling various situations that may arise during your business’s existence. This can include how member meetings and votes will be conducted, distributions of profits and losses, and other parts of your overall business plan and day-to-day operations.
Here are some of the main things to focus on in this section:
Voting rights for each member based on capital contributions
Allocation of profits and losses among the members
Member responsibilities for certain financial and governance aspects
Day-to-day processes
Having an internal document that sets out all of these rules and foundations for running your startup makes it far easier to manage, with a much lower risk of problematic disputes.
Step 5: Add and Remove LLC Members
Finally, you need to consider what will happen if there is a change among your LLC’s business owners, such as the addition of new members or the departure of a former member. Such changes can drastically affect the business, but having an operating agreement helps to address such scenarios.
For example, suppose one of the members of an LLC decides to leave. In that case, you need to consider how their ownership percentages, member contributions, and voting power will be divided among the remaining members. You may also detail how a share buyout could work. All of this helps avoid confrontations or indemnification issues when a member leaves.
Similarly, when a new member is added, a process needs to be implemented regarding handling the process. What level of membership interest will they have? What are their voting rights? This is crucial even for a single-member LLC, as you may decide to bring in a co-owner or multiple new members as your business grows and changes.
Create Your Operating Agreement Through a Filing Service
Having a Maryland LLC operating agreement is a smart move. It provides countless benefits for small business owners, and it can help you start an LLC the right way, with clear rules, an established structure, and a range of other benefits.
Even though it’s not an obligation under Maryland law, it’s still worth making an operating agreement when forming your business, and Swyft Filings can help you do it.
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 Maryland.
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 you have all your necessary documents completed at the beginning.
FAQs
Is an LLC operating agreement required in Maryland?
Maryland state law doesn’t require businesses to have an operating agreement.
How does an LLC operating agreement help protect my assets?
An operating agreement is a legal document that confirms your LLC ownership and membership status. You can use this document if any legal problems arise to protect your personal assets and demonstrate your liability protection.
Who needs access to an operating agreement once it’s drafted?
Members may want to review the operating agreement after it’s drafted, and financial and legal professionals may also need it as a part of their services or duties.
How do I edit information on an operating agreement if membership changes?
If you want to amend your operating agreement, you’ll have to consult with the other members and call a vote based on the voting rights outlined in the document.
What other legal documents do I need to draft for my Maryland LLC?
Every Maryland LLC needs to submit the Articles of Organization. You’ll also need to file an annual report.[3]
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Bibliography
Maryland Law. “§4A-402. Article - Corporations and Associations.” Accessed June 23, 2023.
Maryland General Assembly. “Senate Bill 261.” Accessed June 23, 2023.
Maryland Business Express. “Business Filings FAQ.” Accessed June 23, 2023.
