Vermont LLC Operating Agreement: Drafting Checklist

You’ve decided to create a limited liability company (LLC) in Vermont. That means you must go through a business formation process that includes completing and submitting your Articles of Organization so you can transact in the state according to state law.[1] While preparing to launch your business, you may also want to create an LLC operating agreement.

A Vermont LLC operating agreement helps you build structure into your LLC before forming, making it essential for any small business. Find out why you need one and the steps you’ll follow when creating this internal document for your Vermont LLC.

Key Takeaways

• A Vermont LLC operating agreement solidifies your organization’s status as a limited liability company.

• You’re not legally obligated to draft an operating agreement for your LLC in Vermont.

• Small business owners use operating agreements to define processes and set the “rules” for running their LLCs.

What Is an LLC Operating Agreement?

Unlike your Articles of Organization, which you have to submit to do business in Vermont, your operating agreement is an internal document that never has to leave your limited liability company.

It’s a legal document binding to all members, and you’ll use it for several purposes. These purposes range from defining your members and their ownership stakes to setting operational procedures by which you’ll run your LLC. Examples include assigning responsibility to manage your taxes or annual reports.

Your Vermont LLC should create an operating agreement as part of the LLC formation process. However, you can create one if you have an existing LLC, though you must do so with the consent and oversight of all current LLC members.

State Requirements

The state of Vermont doesn’t require a Vermont limited liability company to create an operating agreement. State law says it’s optional, so you don’t have to worry about making a document to send to the Vermont Secretary of State or the state’s Corporations Division.

That optional approach comes with conditions.

If you choose not to create your own operating agreement, Vermont Statutes Annotated (V.S.A.) says that you must abide by the state’s default rules for LLCs.[2] These rules may contradict the informal structure you create inside your business, meaning you’re overridden by state law if disputes arise.

LLC Operating Agreement Benefits

Your LLC isn’t legally required to have an operating agreement. That fact alone is often enough for some business owners to choose not to create one, especially if they’re already short on time while forming their business entity.

That is often a mistake.

Having an LLC operating agreement comes with numerous benefits. Much like a business plan, it’s not legally required, but you miss out on several valuable advantages if you don’t have one, including the following.

Benefit 1: Define internal processes

Who handles your LLC’s business bank account? What about any business licenses you need to have? These are just two of the many questions you can answer within a legally binding document if you create an operating agreement.

Your agreement is a place to create processes, define roles, and assign responsibilities to the members of your LLC. More importantly, it’s a legal document. The agreement serves as a written record to which you can refer if mistakes get made or LLC members dispute their roles or ownership rights within the company.

Think of it as a document that makes it easier to run a successful business. Without it, you may be dealing with situations where it’s your word against another member’s when issues arise.

Benefit 2: Confirm your business meets the legal definition of an LLC

One of the main reasons to form an LLC is that the business structure offers liability protection. Your personal assets aren’t at risk if the business runs into financial or legal trouble, meaning you have separation in your company and personal dealings.

This structure differs from a sole proprietorship or partnership, in which the individuals take personal responsibility for issues with their companies. You solidify the legal protection an LLC offers when using your operating agreement.

The agreement outlines the owners and members of your LLC, ensuring your business is treated as a separate entity in legal proceedings. Granted, the protection an LLC offers is automatic. Having those protections enshrined in a legal document makes dealing with issues easier.

Benefit 3: Gain credibility

An operating agreement shows that you’re serious enough about your company to create a management structure, set processes, and ensure all LLC members are fairly compensated for their work. That credibility boost makes your agreement an effective hiring tool. By showcasing to candidates, you prove you have their best interests in mind.

The same applies when seeking investment. The more structure you build into your business (denoted in your operating agreement), the more confident investors will feel when dealing with you.

Who Needs an Operating Agreement?

State law does not require you to create an operating agreement. However, every LLC operating in Vermont should have an operating agreement, from single-member LLCs to complex LLCs with dozens of members. To get more specific, it’s a good idea to create an operating agreement if any of the following apply to you:

• You want to ensure there’s no confusion about the type of business entity you’ve created.

• You don’t want to automatically follow state default rules when disputes arise in your LLC.

• You want to lay the groundwork for incorporating the S-Corp tax status by creating an internal structure.

• You have a foreign LLC and want to outline your Vermont branch’s specific rules.

Even though Vermont state law doesn’t require you to have an operating agreement, business owners benefit massively from creating one. It helps you to stay in good standing with your LLC members and plays a crucial role in successful business formation.

Drafting Your Vermont LLC Operating Agreement

Since creating an operating agreement isn’t a legal requirement in Vermont, you don’t have to worry about paying a filing fee or submitting the document to the Vermont Secretary of State. 

A template for this form may be a good starting point. However, your business has unique needs that a template may not cover, so it’s better to follow a more customized process. With these five steps, you can have your operating agreement ready before the end of the fiscal year.

Step 1: Provide Business Information

If you’ve already completed your Articles of Organization, you have all the essential information you need to include in this section of your operating agreement. You’ve elected a registered agent or chosen a registered agent service, and you’ve outlined the particulars of your business.

If you’re not that far into your LLC formation process yet, this part of the operating agreement includes the following:

• Your LLC name (usually your official business name)

• The address of your place of business

• Information about the industry you serve and what you offer

• Details about your registered agent

Your Vermont LLC name is an interesting point. You may use a “doing business as” name (called an assumed name in Vermont) alongside your official name.[3] Make a note of it in your operating agreement.

Step 2: List LLC Members

Next up — ensuring all owners of an LLC have personal liability protection and understand their membership interests. You’ll create a complete list of your LLC’s business owners and members.

That list can include several details. Each member’s name and address are a must, as are their ownership interests, assuming they have any. You can also detail some specifics, such as the distributions each member is entitled to and the status of member contributions.

Whether you have a multi-member LLC or a single-member LLC, you need this list. In the latter’s case, the list protects your personal assets because nobody can claim you’re operating a sole proprietorship. Plus, you build a format to follow if you ever welcome any new members into the fold.

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

When focused on serving clients, it’s easy to forget that your LLC needs a management structure to oversee day-to-day operations behind the scenes. This step ensures you put that structure in place, and you have two options for LLC management:

• Member-managed LLC

• Manager-managed LLC

A member-managed LLC is what it sounds like — an LLC managed by one of its existing members. You assign the responsibility for day-to-day operations to a member you can trust (this could be yourself) and define that responsibility in the operating agreement. It’s a good choice for the owner of a single-member LLC who wants to maintain complete control.

A manager-managed LLC is suitable for you if you’d prefer independent oversight. This structure involves bringing in a third party to handle management, which can reduce conflict and ensure you have an impartial eye on the business. It’s an excellent choice for large LLCs or owners who don’t believe any of their members can handle management.

Step 4: Lay Out Administrative Operations

While Step 3 covers the day-to-day management of your LLC, Step 4 is all about the specific processes you have in place for administrative operations. Think of these processes as the rules by which you run the business. All members abide by them, and they’re protected as part of a legal document.

These processes vary depending on the business, though some common ones include the following:

• Assignment of specific responsibilities, such as generating an annual report, managing a business bank account, or dealing with the Internal Revenue Service (IRS)

• Process for assigning voting rights based on membership contributions or sweat equity

• Rules for the business owners to follow when making capital contributions to the LLC

• Allocation of profits and losses between members

You get to customize here, as not every possible operation applies to your LLC, and some procedures apply to you where they may not for others. For instance, a startup may not need an Employer Identification Number, meaning they don’t need a process for managing it.

Keep an eye on the future when laying out administrative processes. Just because you don’t need a strategy today doesn’t mean you won’t need it in the future.

Step 5: Add and Remove LLC Members

As your business grows, you may have cause to add new members, or remaining members may wish to leave. You’ll need processes for both eventualities. These processes should cover what happens with ownership percentages and member contributions, ensuring all members of an LLC know what happens when internal change occurs.

It’s also a good idea for business owners to use this internal document to detail what happens in the case of a buyout. Finally, don’t assume you can skip this step if you have a single-member LLC. You’ll appreciate having processes in place if you bring in new members in the future.

Create Your Operating Agreement Through a Filing Service

Now you know what it takes to create a Vermont LLC operating agreement, but the overall process of starting a small business is hectic work. You may not have the time to draft an operating agreement when so many aspects of your LLC require your focus.

We can help you avoid mistakes and stay compliant with our LLC operating agreement service. 

We’ve helped over 300,000 business owners who want to start an LLC. We help file Articles of Organization and create operating agreements for your Vermont LLC. With formation prices starting from $0 (plus state filing fees), our team offers the most cost-effective way to get your new business up and running.

FAQs

Is an LLC Operating Agreement required in Vermont?

No, an operating requirement isn’t required by law in Vermont.

How does an LLC Operating Agreement help protect my assets?

Operating agreements confirm your business’s status as a limited liability company to ensure nobody can confuse it for a partnership or sole proprietorship.

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

LLC owners, members, and third-party managers need access to your LLC operating agreement.

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

You can define a process (usually a member vote) for editing any information in your operating agreement. Then, create an amendment and draft a brand-new document.

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

You must submit Articles of Organization to the Vermont Secretary of State to form an LLC.

Bibliography

1. Vermont Secretary of State Business Services Division. “Limited Liability Company (LLC).” Accessed June 29, 2023.

2. Vermont General Assembly. “The Vermont Statutes Online.” Accessed June 29, 2023.

3. Vermont Secretary of State Business Services Division. “Assumed Business Name Registration.” Accessed June 29, 2023.