Iowa LLC Operating Agreement: Drafting Checklist

If you're starting a business in Iowa, there are a few steps to take, including drafting an LLC operating agreement. 

The state of Iowa doesn't strictly require this, but it's still pretty significant. The operating agreement lays out how your business functions internally and its structure. 

So, whether you're just getting started or already up and running, give this agreement some attention, and you will reap the rewards.

Key Takeaways

• An LLC operating agreement is a legal document that outlines the operating procedures of your LLC, along with many adjacent details.

• While not a state law mandate, having an Iowa LLC operating agreement benefits a small business and a large corporation for several reasons.

• Drafting an LLC operating agreement can be done during the LLC formation process or afterward, and you can make it simpler by using a filing service.

What Is an LLC Operating Agreement?

An LLC operating agreement is a foundational agreement that outlines your LLC's structure and operational procedures. It details who are the members of your LLC, their duties, and how to manage the company. 

The operating agreement is the skeleton of your LLC. It sets out the "how" and "why" of how your business runs so that everyone involved knows what to expect and can ensure their interests don't suffer. Without an operating agreement, things are decided by state law, which might not give you all the flexibility you want.

This agreement does not need to be filed with the Secretary of State when registering your LLC.

State Requirements

Creating an operating agreement for your Iowa LLC isn't a legal requirement, but it's still a wise choice. The Revised Uniform Limited Liability Company Act in the Iowa statutes clarifies that an operating agreement can keep your business on track by providing clear rules for everyone involved.[1] Plus, if something goes wrong, you'll have a roadmap to help you get back on track.

You can make an operating agreement without writing anything down, but experts recommend you get it in writing. That way, there's less chance of any confusion or disagreements. 

There's no need to worry about filling out paperwork and taking it to the Secretary of State. Just make sure you keep the agreement somewhere safe with your business records.

LLC Operating Agreement Benefits

A solid operating agreement can provide a more tailored approach to defining the governance of your LLC. You can choose how to share profits and losses, craft meeting rules, determine membership eligibility, and other aspects. 

Without an operating agreement, your LLC must abide by the state's default rules, which may not fit your business goals.

You should consider an LLC Operating Agreement if you want to reap any of these benefits:

• Avoiding confusion and conflicting expectations by outlining plans and agreements on paper

• Establishing separation between personal and business assets

• Making it easier to open a business bank account and obtain business licenses

• Having a more customizable approach on how the business runs, membership interest distribution, voting rights, and more

• Gaining more control over the inner workings of the LLC instead of relying on default state rules

Who Needs an Operating Agreement?

No matter its size or location, any business structured as an LLC needs an operating agreement.[2] Even if your organization is a single-person operation, having a written operating agreement is an excellent way of respecting the state's rules while maintaining independence and autonomy.

As a sole proprietor of an LLC, you may skip out on creating an operating agreement. After all, there's nobody to argue with or split profits. But having this document in place will officially set your company apart from yourself and keep any debts from a business-related fallout from landing on your doorstep.

For LLCs with multiple members, having an operating agreement could be a lifesaver if there are any disagreements between you and other owners. It outlines who has what rights and responsibilities, how to deal with changes in ownership, and how to sort out differences of opinion. 

Drafting Your Iowa LLC Operating Agreement

Creating an LLC operating agreement can be a daunting task. You can draft it from scratch or use an operating agreement template instead for a smooth and efficient process. 

To make things easier, here's a comprehensive guide to help you draft your operating agreement. Following these steps will also answer most of your general questions regarding how to start an LLC.

Step 1: Provide Business Information

You'll need some key information when setting up an Iowa limited liability company. Include your full business name, address, industry, formation date, and the contact info for your registered agent. These details will also go in your Certificate of Organization. 

Your LLC needs a distinct LLC name that doesn't sound like any of the preexisting companies in Iowa. It must add either "limited liability company" or just the "LLC" abbreviation at the end. Your business' physical address is where you should list your LLC's location. If you're running your company from your house, feel free to use your home's address.

The registered agent is the go-to person who receives legal documents on behalf of your LLC, like a gatekeeper. They must be local in Iowa state and free during typical business hours.

Step 2: List LLC Members

Compile everyone that is part of the LLC, including the names of the LLC owners, their stake in the company, and their roles. That includes single-member LLCs and multi-member LLCs. You should write out the ownership interest and voting rights in detail.

The amount of money or property each member contributes to the LLC usually decides how much ownership interest they have. However, you can devise a way to sort out the stakes in the business in your operating agreement.

Moving on to voting rights, members can get a vote for each percentage of the LLC they own, or each member can get one vote without regard for their ownership interest. It's up to the LLC to decide which works best for them.

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

In this step, you must decide between a member-managed or manager-managed LLC.

If you go with the former, all members of the LLC will contribute to business decisions and operations. That's often the best choice for small businesses just starting out.

On the other hand, if you choose a manager-managed option, someone or hired management outside of the LLC itself can take up the reins as "manager" and guide the business in a particular direction. This is usually better for bigger companies with many investors or those wanting an external viewpoint.

Step 4: Layout Administrative Operations

In this step, you should decide how to divide profits and losses, hold member meetings, vote on important decisions, and assemble annual reports. You can customize this section to fit the circumstances of your business.

Regarding profit and loss distribution, start with ownership interests. Usually, how much someone puts into the business regarding capital contributions will scale to the risk and reward they'll incur. 

Your LLC operating agreement also should give details on when member meetings will occur, how everyone will be notified, and what percentage of members must show up for a voting quorum.

And lastly, consider the annual reports the Iowa Secretary of State requires. Ensure your agreement assigns someone to put together and file the report annually.

Step 5: Add and Remove LLC Members

Your operating agreement should cover bringing in new members and removing existing ones. Think of it like a membership to an exclusive club.

Adding new folks can bring in capital and expertise, but they also reduce the ownership interest of current members. Your operating agreement should outline who gets admitted, how much people need to put in, and their stake.

Removing someone from the LLC can be complicated. Your agreement should clarify when somebody can be removed, for what reason, the process for asking them to leave, and how they'll get compensated for their share in the LLC.

Create Your Operating Agreement Through a Filing Service

So you know what goes into an LLC operating agreement, but why not let somebody else take care of all the paperwork? Swyft Filings offers unbeatable prices on LLC operating agreements so you can have the necessary legal documents without considerable expense.

Not having to worry about the operating agreement paperwork frees up your time. This way, you can pay closer attention to other necessities of starting an LLC. By letting Swyft Filings do all the hard work, you can focus on doing what makes your business great — running it the best you can.

FAQs

Is an LLC operating agreement required in Iowa?

No, but it's definitely a good idea.[3] Think of the LLC operating agreement as the instruction manual for a business. Setting up and following these rules ensures that everyone involved knows what to expect. It also shields you from any liability your company may face.

How does an LLC operating agreement help protect my assets?

An LLC operating agreement can act as a shield for your personal assets through the limited liability status. It creates a legal distinction between you and your business so that any debts or liabilities of the LLC won't affect your own funds.

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

All contributors to the LLC and any persons running the day-to-day operations must be allowed to view the operating agreement. Have a copy on hand when you go down to the bank to set up your business account, and give one to your lawyer if you need any legal advice. You don't need to submit it to the Secretary of State, though, as it's considered an internal document.

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

You can modify your operating agreement whenever necessary to accurately reflect any membership changes within the legal entity. The best practice is to document these amendments in writing and get approval from the members involved.

What other legal documents do I need to be drafted for my Iowa LLC?

Aside from the LLC operating agreement, you'd need to get Articles of Organization, a Certificate of Organization, and an EIN (Employer Identification Number), and then check with the local authorities for any business licenses or permits needed in your area.

Bibliography

1. Iowa Legislature. "Revised Uniform Limited Liability Company Act." Accessed June 29, 2023.

2. U.S. Small Business Administration. "Choose a business structure." Accessed June 29, 2023.

3. Forbes. "What Is An LLC Operating Agreement?" Accessed June 29, 2023.