Virginia LLC Operating Agreement: Drafting Checklist

When filing a limited liability company (LLC) in the state of Virginia, your primary concern is drafting your Articles of Organization document. This business formation document outlines what your LLC does, its registered agent, and its members.

Though Virginia state law requires you to create an Articles or Organization, they don’t require an LLC operating agreement. However, it’s highly beneficial for your small business to create an operating agreement for several reasons, detailed in this article and the steps for creating this document.

Key Takeaways

• Virginia state law doesn’t require you to create an LLC operating agreement to obtain limited liability status.

• If you make an operating agreement for your small business, all your LLC members are bound by that agreement.

• An LLC operating agreement offers numerous advantages, including outlining processes for various issues and ensuring you don’t have to abide by the state’s default laws for LLCs.

What Is an LLC Operating Agreement?

An LLC operating agreement is a legal document primarily used to define the roles, responsibilities, and ownership stakes of your LLC owners and members. The document also solidifies the liability protection that forming an LLC provides and defines processes to follow for specific events, such as a member electing to leave.

Unlike the Articles of Organization, you’re not required to obtain an operating agreement to form your LLC in Virginia. Drafting an operating agreement falls in the same category as filing for an Employer Identification Number (EIN) if you have a single-member LLC. It’s not required but beneficial for several reasons, as defined below.

State Requirements

Section 13.1-1023 of the Virginia Limited Liability Company Act states that a Virginia LLC doesn’t need an operating agreement to conduct business in the state.[1] Furthermore, any agreement you create must be consistent with the rest of the Code of Virginia,[2] as well as your Articles of Organization.

In other words, you’re not obligated to create an operating agreement under Virginia law. As such, the lack of an agreement won’t affect your ability to apply for business licenses, assign a registered agent, or transact in the state. However, a business that chooses to create one is bound to that agreement, and the document can’t go against state laws.

LLC Operating Agreement Benefits

Given that Virginia doesn’t require you to have an operating agreement for your LLC, you may consider not drafting one because you’ll save time and money. That may be an unwise choice because an operating agreement does carry several advantages.

Solidify Your Limited Liability Status

The LLC business entity is advantageous because it provides personal liability protection to all of its owners and members. This protection isn’t absolute (a judge may choose to overrule it in some cases), but it offers strong personal asset protection than you get from a partnership or sole proprietorship.

An operating agreement helps you solidify those protections by defining the members of your LLC, their ownership stakes, and their roles. Essentially, you’re creating a legal document you can immediately point to as proof of liability protection if needed.

Bind Members to the Operating Agreement

According to the Code of Virginia, all members of your LLC are bound to the provisions outlined in your operating agreement.[1] In practice, this means the agreement serves as a set of “rules” that each member follows to work within the LLC.

That becomes useful if disputes arise because you have a document to which you can immediately refer. As a result, drafting an operating agreement means you don’t have to seek costly legal advice in cases where you can use the document to resolve disputes.

Override State Laws (To an Extent)

You must follow the state’s laws if you don’t have an operating agreement. This can be a problem, especially if state laws contradict how you want to manage and run your LLC.

An operating agreement isn’t a blanket method of overriding state laws, as the agreement must stay consistent with the laws of Virginia. It allows you to outline rules and provisions for managing your LLC that are more specific to your business than the generic ruleset the state applies.

Who Needs an Operating Agreement?

Technically, no LLC in Virginia needs an operating agreement because state law doesn’t require one. Creating the agreement is not part of the LLC formation process, and you can operate under the LLC business entity without the document.

Still, the lack of a legal need doesn’t mean no LLC should have an operating agreement. It’s easy to argue that your LLC (and its business owners) need an operating agreement in the following cases:

• The business has multiple members or owners who each have different opinions (or could potentially have different outlooks) on running the company.

• Your LLC members have different ownership stakes, roles, and responsibilities you wish to outline in a legally-binding document.

• You want to avoid following the state default rules in cases where disputes arise.

• You wish to future-proof your business against issues such as members leaving the LLC or changes in Virginia state law.

Drafting Your Virginia LLC Operating Agreement

There are several ways to draft this agreement, including using an organization that specializes in creating written operating agreements or following an LLC operating agreement template to ensure you cover all of the significant points for this legal document.

If you wish to draft the document yourself, the following five steps demonstrate how. Remember that the resulting agreement is an internal document, meaning you don’t have to file it with the Virginia State Corporation Commission upon completion.

Step 1: Provide Business Information

The first step of creating an operating agreement is the simplest – outline the basic information during LLC formation. If you’ve already started to draft your Articles or Organization (or have completed them), then you have a document to which you can refer when completing this step.

The information to include in this section of the operating agreement includes:

• Your Virginia business name and basic information about its place of business and what it does

• Information about the registered agent you’ve elected for your business, including their name and registered address

• Some general information about the LLC’s owners, though you’ll go into more detail in later steps

This step is a way of confirming the information in your Articles of Organization (or vice-versa) so you can check that everything from your LLC name to its general function complies with state law.

Step 2: List LLC Members

With the basic information about your LLC completed, it’s time to move onto a list of all your LLC members. Some may skip this step if they’re the sole owner or member of a single-member LLC. However, that’s inadvisable because not having a list of members means you fail to solidify the liability protection that the LLC structure offers.

In other words, this list is about confirming that you own the business and that the LLC structure protects each member and their personal assets. As a result, the information you include in a single-member LLC operating agreement will be the same as in a multi-member LLC operating agreement and consists of the following:

• The names and addresses of all business owners and members

• Details about member contributions and what entitlements those contributions offer to the member

• Information about the ownership interest (if any) that each member has

• Details about the roles and responsibilities each member assumes as part of their work within the LLC

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

Your LLC management takes responsibility for the day-to-day running of the business, including ensuring that all members follow the rules and regulations outlined in your operating agreement. Interestingly, the person (or persons) assigned to this role can be from outside your LLC.

You have a member-managed business if you choose a member to manage the LLC. Many single-member LLC owners prefer this structure because it gives them total control over business operations. However, it can also be a helpful management structure for multi-member LLCs if you have a member who will excel in a management role.

If you’d rather have an independent party oversee the management of your LLC, you can elect to form a manager-managed LLC. According to the Code of Virginia, this manager doesn’t have to be a state resident unless your operating agreement or Articles of Organization state that only members can be managers.[3] This setup can prove advantageous for larger LLCs that require independent oversight.

Step 4: Lay Out Administrative Operations

One of the main reasons for creating an operating agreement is to ensure you have an internal document that defines what happens to your LLC in various scenarios. Outlining the company’s administrative options is your next step after you’ve decided on a management structure.

The specific operations outlined vary depending on the company, and you have free reign to customize processes for almost any scenario you can envision. Still, the following are issues for which most businesses need to account when creating their agreement:

• Determine the voting rights of each member, often based on capital contributions or workload, so that each member understands how much power they wield.

• Create provisions for the day-to-day running of the business, such as rules that govern amendments to your business plan.

• Outline distributions of profits and losses to members, again often based on each member’s capital contributions.

• Define which members are responsible for specific financial and governance issues, such as paying your LLC’s annual registration fees (currently $50 per year)[4] or handling your business bank account.

Consider any situation that may occur in your startup down the line that might lead to disputes between members when outlining administrative operations and during profit allocation. Doing so lets you use your operating agreement to avoid those issues.

Step 5: Add and Remove LLC Members

What happens if a member decides to leave your LLC? What about if you wish to add a new member? Either way, you’ll need to define what happens with membership interest.

In the case of members of an LLC leaving, a process needs to determine how to divide the distributions made to them, their ownership percentage, and their member contributions among the remaining members. These typically also define share buyouts. For new members, you’ll need a process to determine how their contributions affect the interests, ownership stakes, and contributions of the existing members.

Remember that these processes are helpful even if you have a single-member LLC. You never know when you might add new members or encounter a situation like a buyout that affects ownership percentages.

Create Your Operating Agreement Through a Filing Service

By now, you should see how essential an LLC operating agreement is, even to business owners that intend to form single-member LLCs. The document confirms your ownership, outlines membership stakes, and gives you a legal document to which a small business can refer when disputes arise.

All that’s left is to create your operating agreement, either as part of your ongoing filing process or to solidify your company’s standing if you already have an LLC. Either way, Swyft Filings can help.

Our LLC service starts at $0 (plus state filing fees) and takes you through the process you must follow to form an LLC in Virginia. We’ve worked with over 300,000 businesses on various aspects of filing and formation since 2015. We will ensure you have everything in place to start your LLC properly. Contact our team today if you’re ready to take your next step in the LLC formation journey.

FAQs

Is an LLC Operating Agreement required in Virginia?

Virginia state law doesn’t require businesses to have an LLC operating agreement.

How does an LLC Operating Agreement help protect my assets?

An operating agreement helps you protect your personal assets by confirming your LLC’s ownership and membership structure. Consider it a legal document you can point to whenever disputes arise.

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

Once you’ve drafted your operating agreement, it’s generally only needed when internal challenges arise. However, certain financial and legal professionals may ask to see it as part of providing their services.

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

Any amendments made to your operating agreement must be agreed upon by existing members based on the voting rights outlined in your agreement.

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

Every Virginia LLC must submit Articles of Organization before operating in the state. The LLC also needs to pay an annual fee of $50, though it doesn’t need to file an annual report.

Bibliography

1. Virginia Law. “§ 13.1-1023. Operating agreement.” Accessed June 6, 2023.

2. Virginia Law. “Virginia Limited Liability Company Act.” Accessed June 6, 2023.

3. Virginia Law. “§ 13.1-1024. Management of a limited liability company by a manager or managers.” Accessed June 6, 2023.

4. Virginia State Corporation Commission. “Annual Registration Fees.” Accessed June 6, 2023.