Creating an Operating Agreement for a Michigan LLC: Your Complete Guide

What Is an Operating Agreement?

An operating agreement is a key document for forming a Michigan limited liability company. The agreement sets out terms and conditions for the operation of the LLC. The agreement identifies who is in charge of the company, including the members, managers, and officers, and it spells out their duties. It also describes how decisions will be made to pay taxes, accept new members, file lawsuits, enter into contracts, take out loans, and declare bankruptcy.
Although the agreement is not required by Michigan law, it is nonetheless an important document to have. For example, according to Mich. Comp. Laws § 450.4705(1), the default rules for the management of an LLC do not apply if the LLC has a written operating agreement. If the LLC agrees to follow a different set of rules, then those rules will apply instead. An LLC can have just one member, but it still needs to have an operating agreement that specifies how the business will be run .
Typically, the operations agreement is a written contract signed by the members (owners) and/or managers of the LLC. However, Michigan law does not require the agreement to be written down or signed by all members.
If the operating agreement is not written down, the terms of its oral agreement are generally not enforceable under Mich. Comp. Laws § 450.4707(1). Though Mich. Comp. Laws § 450.4707(2) still creates exceptions for some terms, such as a term that the management of the LLC will be governed by the majority of the members. However, having a written agreement with the signatures of all members is a far better option than relying on oral agreements, especially with respect to terms that you cannot modify under Mich. Comp. Laws § 450.4707(6) and terms not protected under Mich. Comp. Laws § 450.4702 which among other things defines the terms and conditions of an LLC.

Essential Components of an Operating Agreement for Your Michigan LLC

A Michigan LLC operating agreement should cover a variety of topics, including the following key elements:
Members’ Roles: For LLCs with multiple members, the operating agreement should explain each member’s role and how management responsibilities are delegated. Are all members equally involved in the company, or is one person responsible for day-to-day operations? Are there any appointed managers? In multi-member LLCs, this is typically referred to as the "management structure."
Decision-Making Process: The operating agreement should spell out how and when decisions are made. Because more members can mean more decision-making input, the operating agreement should clarify how many members it takes to reach a decision. For example, do all members have to agree on a decision, or is a simple majority enough? If some members are not involved in everyday operations, the operating agreement may state that a unanimous decision among members is required to protect the company from ill-advised choices made by those members.
Distributions: The operating agreement should detail the allocation of profits and losses, along with how distributions are paid, whether in cash or through other methods. For example, if a single-member LLC owner wants to take a salary, the operating agreement can provide for it. In a multi-member LLC, the operating agreement can include provisions for how profits will be divided among members.
Scope of Assets: The operating agreement should address how much can be offered to creditors recovering debts owed by the Michigan LLC. In other words, how far can creditors go into a member’s personal assets when pursuing debt recovery? The operating agreement also can spell out how much of a member’s interest in the LLC can be sold to another party, such as a family member.
Termination: LLC termination – or what happens to the assets in the event the business winds down and is terminated – is another key aspect of the operating agreement, particularly if the company does not have a set term. Like dissolution, termination is a process that requires owners to follow a specific sequence of events to close the business and pay off its debts.

Legal Formalities for LLCs in Michigan

Forming an LLC may grant its members unique protections, but these protections are not rights given to every business. The Michigan Limited Liability Company Act regulates the creation and dissolution of each Michigan LLC. Failure to comply with Michigan’s regulatory regime can lead to administrative dissolution, loss of liability protection, and/or other adverse results. As such, LLCs must be formed in compliance with required legal formalities. These legal requirements may influence the terms of the LLC’s operating agreement.
To form an LLC in Michigan, a company must file Articles of Organization with the Michigan Department of Licensing and Regulatory Affairs (LARA). In general, LLC Articles of Organization must set out the following: (a) the name of the limited liability company; (b) a brief description of the business to be transacted; (b) either that the company is to be managed by managers or to be managed by the members; (c) for a manager-managed company, each manager’s address; or (d) for a member-managed company, the name and address of each member participating in the management of the company; (e) the street address of the registered office and the name of the resident agent; and (f) the latest date on which the company is to dissolve. Other provisions may also be included as authorized under § 450.4201(3).
Complications may arise when members want to add a partner after the formation of the LLC. The LLC may need to file an Amended Articles of Organization with LARA if the Articles of Organization are amended to reflect any necessary changes made to the LLC. Member consent is generally required to amend an existing Articles of Organization, although the operating agreement may allow for modification by a designated number of members (or perhaps by a manager).

Advantages of Using a Template to Create Your Operating Agreement

Using a template when drafting your operating agreement has several advantages. First, it can help maintain consistency. For an LLC with multiple owners, consistency is key to ensuring that everyone is treated fairly. A well-written template will help keep all member interests protected and make sure that everyone is paid the same for doing the same work, for instance.
Second, using a template saves a great deal of time. As any entrepreneur knows, time is money. The consistent structure a template provides, as well as a consistent list of items to include, can save you valuable hours of research and writing. Even if the template requires important changes or additions specific to your business, it can still save a good deal of time when compared to starting from scratch.
Lastly, using a template helps ensure completeness. A good operating agreement template will have a list of all the provisions that should be included in your agreement, as well as a place for you to write in any additional provisions that are relevant to your business. This will save you time researching what needs to be in your operating agreement, and make sure that nothing crucial is left out.

How You Can Tailor a Template to Meet Specific Needs

One of the best things about templates is that they are just that – templates. These documents are designed to be a starting point, and it is up to you to get those papers to perfectly fit your own unique needs and circumstances. Say, for example, the standard operating agreement template you downloaded doesn’t have provisions regarding the sale of shares; maybe that is an option you will need. Or perhaps you want to offer dissident operatives an exit strategy , which you also don’t see in the document. Having this information is not going to help you very much; you need to revise it to suit your needs. Here’s how:
You’ll have to use your own judgment to figure out what to add to your operating agreement. But here are some additional items that many companies include in their documents: Use these ideas as a jumping-off point to adapt the operating agreement template to meet the needs of your Michigan LLC.

Common Pitfalls to Avoid

When a business owner is starting a new Michigan LLC, they may be tempted to purchase a low-cost operating agreement. However, in this section, I’m going to talk about common mistakes that business owners make when drafting or creating an operating agreement, especially from templates.
First and foremost, when you’re creating an operating agreement there are significant advantages in using a lawyer. It’s understandable that most business owners want to save money. Depending on how you draft your operating agreement, a botched one can really come back and haunt you later on. It’s so important to get it done the right way. There are no shortcuts around it. One of the biggest mistakes people make is that they don’t read the operating agreement itself. When you’re creating an operating agreement, you have to painstakingly go through every section. I’ve had clients come to me and say they want a multi-member operating agreement for their Michigan LLC. When I tell clients those agreements can be 20 pages long (or more), they usually sigh in resignation. You have to read it. You have to understand it. You have to know what goes in and what goes out. You need to understand how decisions are made and how distributions to members are made. You have to know how percentages work. The profit and loss distribution. If you’re talking about a buy-sell agreement, you have to understand how the buyout price works. You need to understand the triggers for buyouts. You need to understand whether the person automatically buys them out or not. It’s an incredibly big project. You need to do all that work upfront, and if you don’t, you’ll probably end up paying a lawyer to fix it later. The first idea here is to absolutely read your operating agreement. Don’t just start filling out the blanks and think you’re done. The second idea is that the state of Michigan has certain basic language that has to be in the operating agreement. Your operating agreement needs to say that it is governed by Michigan law. It needs to say that the operating agreement takes precedence over the articles of organization. If you have a buy-sell agreement, it needs to say that that buy-sell agreement takes precedence over the operating agreement. Other ideas of basic language that you need to have in your operating agreement include the date of the operating agreement. You need to talk about the manager and the member. You talk about members coming and going and exiting the company. If you’re talking about a buy-sell agreement, you need to talk about how distributions work, decision-making works, and LLC procedures. These are very basic ideas that need to be included in your Michigan operating agreement.

Good Sources for LLC Operating Agreement Templates

When it comes to finding reliable Michigan LLC operating agreement templates, you have several options at your disposal. Primarily, your options are as follows:
Free Resources
There are quite a few free resources online where you can find bare-bones LLC operating agreements for free. These websites usually have a very basic operating agreement sample, and some even provide free templates that you can customize yourself. The downside is that these basic documents usually contain illegal components, as well as clauses that are simply not applicable to Michigan law. Even worse, many of these websites that provide free LLC operating agreement samples often charge you to download the template or change the information. This should be avoided, as it is generally illegal to alter a contract without express written consent or other necessary language in the contract.
Paid Resources
Paid resources are definitely superior to free resources, but there are still varying levels of quality here. You can find paid resources for as little as $99, all the way up to $1,000+. The common theme among all paid Michigan LLC operating agreements are that they do not contain bad language (or at least try to avoid it), and they are all designed to be tailored for Michigan law . Furthermore, paid resources also allow you to customize the operating agreement to your satisfaction, and they are deliverable in various formats, such as Microsoft Word and PDF. All in all, a paid template will save you an incredible amount of time and money over creating your own operating agreement or trying to modify an existing one without proper experience or guidance.
Custom Drafting
The best option is always to hire a professional to create your Michigan LLC operating agreement for you. There are certainly pros and cons to working with an attorney for your operating agreement, but the most important advantage is having a customized and well-crafted product legal for your state of Michigan. You should keep in mind that while working with a Michigan LLC business attorney on your operating agreement is not free, it also does not need to be incredibly expensive. In all likelihood, the level of service you receive when hiring an attorney will remove the necessity to work with the attorney again, as your business needs will have already been addressed with the operating agreement. It is also important to employ an attorney who specializes in business law, as otherwise they could miss important details that are relevant to your Michigan LLC.