How to Form an Ohio Limited Liability Company – Part II

By Drew Stevens - February 11, 2019 - Corporate & Business

In our last post, we began to cover forming an LLC in Ohio. In this post, we’ll cover the third major component of forming your startup or company, writing your operating agreement.

What is an Ohio Operating Agreement?

An operating agreement is a legal contract between the members of the company and the company. For those of you more familiar with forming a corporation, where a corporation has stockholders, an LLC has members. The operating agreement outlines how the company will be run, the powers and limitations of both the company and the members, the capital contributions of the members, and other key aspects of running an LLC.

What goes into your operating agreement will likely revolve around two main categories – what is required under state law what the members of the LLC desire to have put into writing. With the former, each state has its own statutory regulations concerning LLCs. In Ohio, Ohio Revised Code Chapter 1705 outlines how Ohio LLCs are setup, operated, and maintained.

Operating Agreement Issues

There are a number of concepts to consider when drafting your operating agreement. One of the most important is the number of members involved in the LLC and the powers and duties of each member.

Single Member LLC Operating Agreements and Multi Member LLC Operating Agreements

In the case of a sole proprietor, a single member LLC operating agreement is usually pretty straightforward. A good single member operating agreement will cover issues such as financial and accounting matters, operations, compensation of the member, an S-Corp election (if desired), and dissolution and winding down the company.

LLCs that have multiple members have additional considerations. One of the most important is whether the LLC will be manager-managed or member-managed. With a member-managed LLC, the business and affairs of LLC are run directly by the members. An operating agreement can specify whether certain decisions require a majority vote, supermajority vote, or unanimous consent.

A manager-managed LLC can introduce a higher degree of formality and checks and balances, if desired by the members. Managers can be elected and can be charged with major company decisions. However, certain decisions and actions can still require a specific amount of consent from all of the members. A board of managers, similar to a corporation’s board of directors, can also be setup.

How to Write an Operating Agreement

If you’re writing an operating agreement for a more complex LLCs, you can introduce a variety of other factors. Possible options include vesting for key employees and members. With vesting, certain members earn equity based on triggers including certain amounts of time with the company or specific goals met.

For example, with a software company, key engineers may earn equity over a period of three to five years with the company or when key features of a platform are built and go live.

Other concepts to consider include tag along and drag along clauses, the company’s and other members’ right of first refusal to buy units of withdrawing members, and what happens if a member dies or becomes disabled.

Business Law Attorney Columbus Ohio

Whether you need a small business attorney in Columbus, Ohio or a business formation attorney in Columbus, Ohio, our firm has an attorney that can help you with your operating agreement. If you think you’re having problems with your operating agreement, contact us today.