Michigan LLC Operating Agreement: Drafting Checklist

When you decide it’s time to start your limited liability company in Michigan, the first step to set it in motion is to submit specific legal paperwork. For example, small business owners must turn in their Articles of Organization to verify their business formation.[1]

However, that’s not all — an LLC operating agreement is also in order. It’s a critical document that paves the way for the success of your enterprise, but what exactly is an operating agreement?

You’ll find out right here. We’ll discuss the ins and outs of operating agreements, their benefits, and if any state laws require you to submit one during your LLC formation.

Key Takeaways

• An LLC operating agreement isn’t required by law in Michigan, but it’s essential for small business owners who want to be clear about each member’s role from day one.

• A Michigan LLC operating agreement gives you peace of mind by proving your personal assets are separate from company property.

• Swyft Filings is a filing service that offers various services for your LLC formation, such as drawing up and submitting an operating agreement on your behalf.

What Is an LLC Operating Agreement?

To shed light on an LLC operating agreement, we first need to define it. According to the National Association of Tax Professionals, an operating agreement is a legal document specifying each member’s ownership structure, roles, and responsibilities.[2] In other words, it establishes how your limited liability company operates as a structure independent of its members.

A detailed operating agreement of your LLC elaborates on different aspects of your LLC formation and ownership:

• Capital contributions of each member

• Profit/loss allocation

• Voting rights

These are all vital factors of running your company. You should always submit this document when forming your enterprise (alongside the Articles of Organization).

If you’re a single-member entity, you are the only person who needs to sign the document (unless you delegate some of the responsibilities to a manager). Otherwise, every member listed on your formation documents must agree with the terms and sign on the dotted line.

State Requirements

When launching your LLC, one of your priorities is to comply with state laws. This way, you get to keep your good standing with the Secretary of State and preserve your reputation. 

The good news is that no state of Michigan law requires you to submit your LLC operating agreement. Even though the Michigan Limited Liability Company Act doesn’t call for an operating agreement, this doesn’t mean you should form your company without one.[3]

On the contrary, drawing up an operating agreement is one of the best decisions for small business owners. It shields you from personal liability and provides a clear roadmap at various junctions of your enterprise journey.

LLC Operating Agreement Benefits

Here are some of the reasons you should submit this document when building your organization:

• Personal liability heads out the door — Although your limited liability status separates your private assets from enterprise property by its very nature, it might not be enough. Courts may need you to prove your status with an official document, such as your operating agreement. That’s why many attorneys recommend drawing up this internal paper as part of their legal advice.

• It complements your business plan — You may have a sound business plan laying down the basics, such as financing and product development. But what about other aspects, like adding or removing LLC members? That’s where an operating agreement comes in. It tells you how you’ll go about such changes, which, along with your business plan, reduces the uncertainty associated with running a firm.

• The agreement provides critical roles and responsibilities — If you have multiple members or managers, you must delegate their obligations in writing. That’s where the operating agreement comes in. You can determine who handles income tax filings, employee management, and partner communication. A thriving company is much easier to achieve when everyone understands their roles.

Who Needs an Operating Agreement?

According to Michigan state law, an operating agreement isn’t necessary when setting up an LLC. It’s not mandatory for incorporation, but let’s step back. Why risk diminishing the benefits of having a Michigan LLC by not drawing up this simple document?

Without an operating agreement, you may have trouble during disputes. For example, a court may refer to state default rules when reaching a verdict, which doesn’t consider the specifics of your company or business formation. Before you know it, your private property may become inseparable from your company assets, neutralizing the most significant advantage of being an LLC owner.

So don’t take a gamble. LLC owners should always draw up an operating agreement, regardless of your place of business or ownership structure. The same goes for other business owners, including those at the helm of an S-corp, sole proprietorship, and general partnership. This internal document can make all the difference for any business entity.

Drafting Your Michigan LLC Operating Agreement

Now that there’s no more doubt as to whether or not you should have a Michigan LLC operating agreement, let’s jump to the action step — drafting your written agreement.

To some extent, the process is similar to submitting your Articles of Organization, which you can download from the Michigan Department of Licensing and Regulatory Affairs.[4] From there, you submit your documentation to the Corporations Division (not with the Secretary of State). The filing fee is $100.

As for your operating agreement, you can find a template of this legal document online or draft it from scratch. Whatever route you take, be sure your paper contains the following information.

Step 1: Provide Business Information

Don’t forget to list the company’s official name that tells the state of Michigan you’re an LLC. To do so, your LLC name should include “limited company,” “limited liability company,” “LLC,” or “LC.”

To eliminate any guesswork associated with this stage, copy the information directly from your Articles of Organization. Remember that this isn’t the only basic information about your enterprise. Here’s what else you should have in your operating agreement:

• Registered agent information — This person or business entity accepts legal correspondence on your behalf, including service of process and annual report reminders. Use their full name and registered office in your operating agreement.

• Place of business — Your internal document should also tell the state where you’ve launched your company. Enter your physical street address, the same as in your Articles of Organization.

• Date of establishment — An operating agreement generally reveals the date of your LLC formation.

• Taxation form — Be sure to tell the state how your enterprise will be taxed. For example, you can opt for sole proprietorship taxation if you run a single-member LLC.[5]

Step 2: List LLC Members

The next step is to list all business owners of your company. In this case, business owners are referred to as members. Like the previous section, this section should offer basic information:

• Names and physical street addresses of the members of an LLC

• Members’ ownership (ownership percentages or ownership interest) according to capital contributions

• Voting rights

Listing members makes perfect sense if you have a multi-member LLC startup. But what about a single-member LLC? Contrary to popular belief, providing basic information is a great decision, even if you’re the only company member. 

The reason is simple — a single-member operating agreement proves your ownership structure and helps protect you from personal liability. This way, your personal assets remain safe in the event of a dispute.

So, member information isn’t redundant in any case. Whether you have multiple members of an LLC in your joint venture or you run your company yourself, details about business owners should be part of your agreement.

Step 3: Decide Member-managed vs Manager-managed

A member-managed LLC is run by LLC owners only. They have all the voting rights and perform every day-to-day activity.

By contrast, professional managers usually are in charge of a manager-managed enterprise. The members delegate some of the powers to these managers, allowing them to sign documents and conduct daily tasks on their behalf.

Consider the following differences between these LLC management types to choose your management structure:

• Management of the company is more straightforward with member management for a single-member LLC.

• Member management is better for LLC owners who want to retain complete control over their company.

• Manager-managed structures streamline the management of larger firms.

• Manager management allows owners to delegate some of the duties to their managers, which is a massive weight off the members’ shoulders.

Step 4: Lay Out Administrative Operations

For your operating agreement to point you in the right direction, it must contain certain day-to-day administrative operations. Here are a few must-haves for your internal document:

• Who manages your business bank account and annual report submissions?

• Who opens additional bank accounts?

• How are the company’s voting rights and other affairs distributed according to capital contributions?

• Who oversees profit and loss allocation?

• How do you ensure your startup aligns with the specific needs of your business plan?

• How do you customize and edit your operating agreement?

• Who communicates with the IRS and submits income tax?

Step 5: Add and Remove LLC Members

Whether you’re a single-member LLC or there are multiple members of an LLC on board, your ownership structure may change. You may add new members and remove original ones, which affects membership percentages and the voting rights of the remaining members.

Your operating agreement should lay out the answers to the following questions:

• How will you handle a buyout or indemnification of a company member?

• Do you need to take any severability clauses into account?

• How much do member contributions and ownership percentages change when adding and removing business owners in your legal entity?

• How do new LLC owners affect your voting rights?

Create Your Operating Agreement Through a Filing Service

There’s no way around it — if you want your Michigan LLC to prosper, you need an LLC operating agreement. If you deal with a dispute at some point in your business, you can always turn to this document as proof of ownership. Plus, it helps you resolve any internal conflicts quickly and painlessly.

Whether you want to start an LLC or have already begun the filing process for your small business, Swyft Filings is at your beck and call. We offer a streamlined operating agreement service to help your small business take off. Contact us, and we’ll work with you to draft your document in no time, so you can tend to other matters and improve your chances of success.

FAQs

Is an LLC Operating Agreement required in Michigan?

No. You’re technically not required to create and submit an operating agreement in Michigan. That said, you want to have one, nevertheless, for several reasons. The agreement helps protect your personal assets and offers a roadmap for crucial company activities.

How does an LLC Operating Agreement help protect my assets?

An LLC operating agreement is a lifesaver when protecting your private property. You can use it to prove your ownership structure, removing any doubt that you’re running an illegitimate organization. That’s why these agreements are commonly referred to in dispute resolutions.

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

Technically, nobody other than your members and managers needs access to your operating agreement after the drafting. Remember that you might need to present it to attorneys, financial institutions, and other parties in case of disputes, dissolution, or ownership changes.

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

If your membership structure changes, you must develop a brand-new operating agreement. All members must agree with the amendment and sign the new paper.

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

You’re only required to submit your Articles of Organization to file a Michigan LLC. Again, an operating agreement isn’t necessary, but it should go hand in hand with your Articles of Organization. You may also need to complete an application for business licenses or an EIN.

Bibliography

1. U.S. Small Business Administration. “Business Guide — Register your business.” Accessed June 7, 2023.

2. National Association of Tax Professionals. “Limited Liability Companies.” Accessed June 7, 2023.

3. Michigan Limited Liability Company Act. “Act 23 of 1993.” Accessed June 7, 2023.

4. Licensing and Regulatory Affairs. “Limited Liability Company.” Accessed June 8, 2023.

5. Internal Revenue Service. “Sole Proprietorships.” Accessed June 8, 2023.