Rhode Island LLC Operating Agreement: Drafting Checklist

Drafting certain documents for your Rhode Island small business formation should be your priority in the development process. One of the documents you should consider creating is your LLC operating agreement.

Read on to find out what the Rhode Island state law says about the form, including whether it’s required and what elements it should contain. 

Key Takeaways

• You’re not required to create a Rhode Island LLC operating agreement when starting a small business in the state.

• Drafting an operating agreement can benefit you and your LLC, as it reduces the risk of personal liability and helps streamline decision-making.

• An operating agreement should include essential business information, each member and their capital contributions, your management structure, administrative operations, and the process of adding and removing members.

What Is an LLC Operating Agreement?

An operating agreement is a legal document that provides critical information about your company and how you do business. It often lists the rules and provisions that govern your decision-making and tells you how to go about critical situations. Once each member of your limited liability company signs the paper, it becomes legally binding.[1]

Your LLC operating agreement is similar to other documents you submit during your LLC formation. For example, it’s closely related to your Articles of Organization, which contain the name and address of your organization. It also includes the information about your registered agent (also known as resident agent) and Employer Identification Number (EIN).[2]

State Requirements

You must file your Articles of Organization by Rhode Island state law to launch your LLC. You must submit it to the Rhode Island Department of State (Division of Business Services). More specifically, you have to forward the document to the Rhode Island Secretary of State and pay a $150 filing fee to register your enterprise.[3]

That’s not the case with operating agreements. According to the Rhode Island Limited Liability Company Act, you’re not legally required to enter into an operating agreement when launching your business entity.[4] You can register your enterprise without drafting this document.

LLC Operating Agreement Benefits

Even though the state of Rhode Island doesn’t require you to draft your operating agreement, many business professionals and lawyers provide this legal advice — draft your agreement despite the lack of legal requirements.

Here are the reasons you should create this internal document:

Reason #1: Protecting your personal assets

One way to preserve your limited liability status and protect your personal finances is to prove you’re a legit LLC. That’s precisely what an operating agreement does. It shows you’re a legal enterprise’s owner (or one of the owners), meaning you don’t stand to lose any private property in case of a lawsuit.

Therefore, an operating agreement may not matter much when applying for business licenses, but it makes a world of difference when protecting you from liability. It backs up the main reason you’ve started or want to create an LLC: to keep your personal finances unharmed in the event of losses.

Reason #2: Helping you open a business bank account

Just because the Secretary of State doesn’t require an operating agreement, it doesn’t mean other institutions won’t request this document.

For instance, you might need the agreement to open a business bank account or apply for a credit card. Financial institutions look at many factors when determining your eligibility, and they may only consider you a legit entity with this internal document.

Consequently, you may compromise many goals in your business plan by reducing your financing options. All it takes to avoid this scenario is to draft an operating agreement for your LLC.

Reason #3: Neutralizing the risk of default state rules

Another outcome of not drafting an operating agreement is being subject to default state rules. Without this internal document, your hands are tied. Since you don’t have an internal form that tells you how to run your business, the state of Rhode Island uses default provisions to govern your enterprise.

Think about it — would you want the state to choose your ownership structure for you? Of course not. It may go against your business plan and essentially put state clerks in charge of some aspects of your enterprise.

Don’t fling caution to the wind. Draft a detailed operating agreement to make sure you lead your organization your way.

Who Needs an Operating Agreement?

Again, the state law doesn’t require any domestic or foreign LLC to create an operating agreement, regardless of their size or place of business. However, you should still draft this internal document for your business entity. It makes sense in these various scenarios:

• You wish to prevent the state of Rhode Island from governing your business under state default rules.

• You’re considering transitioning into a sole proprietorship at some point in your business and need a robust internal structure before making the change.

• You want to prove that your private assets are separate from enterprise property before starting your LLC formation or completing an LLC formation that’s already underway.

• You’ve decided to file for the incorporation of an S-corp tax classification and need to divvy up member responsibilities beforehand.

Drafting Your Rhode Island LLC Operating Agreement

Creating a legit written operating agreement is less complex than submitting your Articles of Organization. It’s also less expensive since you don’t have to pay a filing fee for forwarding the paper to the Rhode Island Secretary of State at their Providence office.  

However, you still need to be careful during the drafting stage. Whether you download an LLC operating agreement template or create the paper from scratch, the drafting phase of your legal document should include these five steps:

Step 1: Provide Business Information

To kick things off, provide the basic information about your organization:

• Your LLC name: Write your enterprise’s full business name (entity name), including the limited liability company designation (e.g., LLC or LC). You should use the same name as mentioned in your Articles of Organization.

• Address: Mention the physical street address of your enterprise. A P.O. box isn’t allowed when providing the place of business of your LLC formation.

• EIN: State your EIN as the Internal Revenue Service (IRS) provides. If you don’t have an EIN, you just complete and submit form SS-4 to apply for it.[5]

• Registered agent: State the entity or person who receives service of process on behalf of your LLC.

Step 2: List LLC Members

The second step is to list each member of your LLC. Don’t skip this step, whether you’re a single-member LLC or multi-member LLC. It might be the most important section because it separates personal assets from business entities and helps eliminate personal liability.

Here’s the information business owners should have about all members of an LLC:

• Names and addresses

• Ownership interest (membership interest)

• Member contributions to your startup

• Voting rights, profit and loss distributions, and ownership percentages according to capital contributions

Step 3: Decide Member-managed vs. Manager-managed

After clarifying who runs your company, you must determine how it’s run. In other words, you must decide on the proper LLC management structure. Two options are available: a member-managed LLC and a manager-managed LLC.

Consider the benefits and drawbacks of both to decide:

Benefits of manager-managed LLC

• It’s a simple solution for large companies.

• Members get more free time.

• There’s a higher probability of passive investment.

Drawbacks of manager-managed LLC

• Members often relinquish some of their control.

• The salaries of managers can be well over $150,000.[6]

Benefits of member-managed LLC

• It’s more affordable than manager management.

• Members are in total control over decision-making.

• There’s a lower chance of mistakes due to an understanding of company goals.

Drawbacks of member-managed LLC

• It’s overwhelming for members.

• Attracting investments takes more work.

Step 4: Lay Out Administrative Operations

If any of your members don’t understand their role in your company, you can use this section to bring them up to speed and eliminate confusion. For example, an effective duty allocation can look something like this:

• Opening and managing your business bank account

• Overseeing the execution of your business plan and knowing when to customize the plan

• Making annual reports and tax filing with the IRS

• Collecting the necessary documents for your EIN application

• Performing other day-to-day operations, such as buying stationery, client outreach, and compliance with state laws

Step 5: Add and Remove Members

Your internal document should also reflect membership changes. For instance, what happens when you add new business owners or one of your members leaves? You need to know how to go about these situations, and the operating agreement should be your North Star.

Make sure the paper covers the following points:

• The criteria for adding new members (e.g., minimum member contributions)

• How bringing new business owners on board influences ownership percentages

• The impact of removing a member of the remaining members and their membership interest

• Harmonizing buyout and indemnification agreements with your company policies

Create Your Operating Agreement Through a Filing Service

One of the most intelligent decisions small business owners can make is to draft a Rhode Island LLC operating agreement. This holds true whether or not you plan on tweaking your business structure later on and classifying your enterprise as an S-corp for tax purposes. The document allows you to start an LLC on the right foot and avoid personal liability under Rhode Island state law.

Due to the tremendous significance of this form, you need to get it right. However, making a mistake is easy since you already have a lot on your plate. 

With our business services, we’ll draft your operating agreement on your behalf. Provide us with basic details about your organization and leave the rest to us. Your document will be prepared professionally and according to your specific needs. Best of all, we are the most affordable service in Rhode Island, so we’ll help keep your budget intact.

FAQs

Is an LLC Operating Agreement required in Rhode Island?

No. Rhode Island doesn’t require drafting an operating agreement during or after your LLC formation. Whether you do so is entirely up to you, but there’s no reason not to prepare this document. It’s a great way to protect personal liability and follow up on your business plan.

How does an LLC Operating Agreement help protect my assets?

An LLC operating agreement can help protect your assets by defining your limited liability status. It confirms to the state of Rhode Island that your private property is separate from your enterprise assets, so you’re not personally liable for any expenses incurred by your organization.

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

The only individuals who always need access to your operating agreement are your LLC members. Once they sign the agreement, they retain their right to examine the paper at their discretion if they need clarification on certain company decisions or responsibilities.

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

The only way to edit information on your operating agreement in the event of membership changes is to draft a new document and have it signed by each stakeholder. For instance, if you’re adding a new business owner, the number of signatories increases by one. Your agreement becomes legally binding only after each stakeholder signs on the dotted line.

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

Technically, you only need to draft your Articles of Organization when filing for your Rhode Island LLC. Don’t forget to apply for your Employer Identification Number, too. Without one, you may not be able to register your company, and you risk significant tax penalties.

Bibliography

1. U.S. SBA. “Basic Information About Operating Agreements.” Accessed June 30, 2023.

2. State of Rhode Island, Department of State — Business Services Division. “Instructions for Filing Articles of Organization for a Domestic Limited Liability Company.” Accessed June 30, 2023.

3. Rhode Island Department of State. “Costs & Fees.” Accessed June 30, 2023.

4. Rhode Island General Assembly. “Chapter 16 — The Rhode Island Limited Liability Company Act.” Accessed June 30, 2023.

5. IRS. “Employer Identification Number.” Accessed June 30, 2023.

6. Bureau of Labor Statistics. “Occupational Employment and Wage Statistics.” Accessed June 30, 2023.