An Illinois LLC Operating Agreement, to put it simply, is like a tailored sketch for your LLC which delivers an easy-to-understand backbone for its organization. Imagine we're enjoying coffee and I explain it as your unique playbook that unfolds the principles governing your business activities, encompassing facets like ownership assignments, decision-making methods, and succession strategies.
With Illinois LLC laws at its foundation, this agreement is where you'll pinpoint essential features such as the duties of members, the system of decision-making, and the techniques for resolving conflicts. It serves as your GPS for smoothly navigating any potential miscommunications and keeping your entrepreneurial aspirations running without a hitch.
No, it's not legally required in Illinois under § 805 ILCS 180/15-5. Single-member LLCs need an operating agreement to preserve their corporate veil and to prove ownership. And multi-member LLCs need one to help provide operating guidance, determine voting rights and contributions.
Read on to learn more about Illinois operating agreements, including:
Here are some key components that are typically included in a Illinois LLC operating agreement:
Let's break down the usual sections and provide some explanation for each to guide you.
By this phase, you're aware of your LLC's name—it's the one you registered when structuring your LLC. You'll nevertheless want to articulate your LLC's role. Don't worry about over-specifying, a more generalized statement affords you the flexibility to venture into new opportunities without needing to refile.
OPERATING AGREEMENT of [COMPANY NAME]
This operating agreement is adopted as of [Date] (the “Effective Date”), by [Member’s Name] , an individual and the sole member (the “Member”) of [Company Name] (the “Company”).
The Member hereby adopts this agreement as the operating agreement of the Company, which agreement sets forth the entire understanding of the Member regarding its subject matter and supersedes all prior understandings and agreements regarding its subject matter.
The purpose of the Company is [ Company Purpose] , and the conduct of other activities as may be necessary or appropriate to promote the stated purposes, and to engage in any other lawful business or activity for which a limited liability company may be organized under the Act.
This part illustrates if your LLC will be managed by a member or a manager. It further portrays each member's rights and responsibilities, ranging from capital contributions to voting rights, and how the management structure is configured. Albeit it might seem rather superfluous as sole member, it's a cornerstone for establishing the edifice of your single-member LLC.
The business and affairs of the Company will be managed by the Member. The vote, action, decision, or consent of the Member will constitute a valid decision of the Member and the Company. The Member may appoint one or more officers (including the Member, if the Member is an individual) who will have such powers and authority to act on behalf of the Company granted to them by the Member.
The business and affairs of the Company will be managed by the manager of the Company and any successor thereto appointed by the Member, which manager may also be referred to as the Company’s president (the “Manager”). The initial Manager will be [Manager Name] , who will serve until the Manager’s death, removal by the Member (for any reason or no reason), or resignation. The Manager will have the right and authority to manage the affairs of the Company and make decisions and take action with respect thereto without further approval or consent of any kind by the Member. Except as otherwise required by this agreement and in lieu of any limitations set forth in [State Name] ’s laws for limited liability companies (the “Act”), the Manager will be solely responsible for and is hereby authorized to manage and operate the business of the Company. Except to the extent that the authority of the Manager is expressly limited by the Member, the vote, action, decision, or consent of the Manager will constitute a valid decision of the Manager and the Company.
Your registered agent is akin to your company's postal service, accountable for receiving and managing critical paperwork for the business. You can decide to include them in your LLC agreement, but it's entirely optional as you would have listed them in your formation paperwork submitted to your state.
The Company’s registered agent in State is: Registered Agent Name , Address . The members may designate other registered agents or offices at any time in this state or, if necessary, in other states.
Think of the "LLC term" as your Limited Liability Company's birthday. It's essentially the timespan your LLC is crafted to exist, as outlined in your formation paperwork. While the typical LLC proprietor initiates LLCs intended to function indefinitely, you can opt to set a specific period or expiration for your LLC.
Most states default to a "perpetual" LLC—which, contrary to how it sounds, isn’t a lifetime commitment. It simply means it will continue indefinitely or for as long as you want it to. Most LLCs in Illinois opt for this perpetual duration. Here's a sample provision:
The duration of the Company will be perpetual.
Capital Contributions mirror the finance, property, or services you offer to your LLC to fire up its operations. It's your initial investment you inject to get your entrepreneurial wheels spinning. For single-member LLCs, these contributions emerge solely from you, the only proprietor, giving you the autonomy to decide the amount of funds you wish to invest in your venture.
Proper documentation of your capital contributions is pivotal as it displays your business's financial blueprint and can furnish critical details for tax-related matters.
The Member’s capital contribution(s) to the capital of the Company for the Member’s membership interest in the Company will be reflected on the books and records of the Company.
The members have made or shall make the contributions of cash, property or services to the LLC as set forth on Exhibit A attached
Nestled within your LLC's Operating Agreement, the Indemnification segment is your safety net, safeguarding members from a myriad of expenses associated with any legal issues that could potentially evolve from their roles in the company. This implies that your LLC covers any legal bills or reparations if a member faces a lawsuit linked to their duties for the enterprise.
This agreement should lucidly identify when and under what circumstances the LLC will provide this blanket of protection, including any exceptions. Typically, indemnification doesn't extend to intentional misconduct or gross negligence. It's crucial to tailor these terms according to your business's specific risks as a precautionary step.
The Member, the Manager, the officers, and the organizer of the Company and their respective affiliates, stockholders, members, managers, directors, officers, partners, employees, agents, trustees, and representatives (individually, an “Indemnitee”) will be indemnified by the Company against any and all losses, claims, damages, liabilities, expenses (including legal fees and expenses), judgments, fines, settlements, and other amounts arising from any and all claims, demands, actions, suits, or proceedings, civil, criminal, administrative, or investigative, in which the Indemnitee may be involved, or threatened to be involved, as a party or otherwise by reason of the Indemnitee’s status as any of the foregoing, which relates to or arises out of the Company or its assets, business, or affairs, if in each of the foregoing cases (A) the Indemnitee acted in good faith and in a manner the Indemnitee believed to be in, or not opposed to, the best interests of the Company, and, with respect to any criminal proceeding, had no reasonable cause to believe the Indemnitee’s conduct was unlawful, and (B) the Indemnitee’s conduct did not constitute gross negligence or willful or wanton misconduct. The termination of any action, suit, or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere, or its equivalent, will not, of itself, create a presumption that the Indemnitee acted in a manner contrary to that specified in clause (A) or (B) above. Any indemnification under this section 5 will be made only out of the assets of the Company, and the Member will not have any personal liability on account thereof.
Like a role in a play, your Illinois LLC can fit into one of four tax statuses: sole proprietorship, partnership, S corporation, or C corporation. How your LLC gets taxed depends on the number of members and the tax status your business elects with the IRS.
Sections related to tax status should be included in your LLC's operating agreement. They discuss your chosen tax status, how you can modify it, and how you handle tax returns and allocations (when necessary). It assists your LLC in drawing up a financial plan, covering profits, losses, dividends, and taxes, and affording a clear strategy for managing any tax-related concerns that may arise.
The Company will be disregarded for federal and state income tax purposes. The admission of one or more additional members, however, will cause the Company to be recognized for tax purposes, and to be taxed, as a partnership.
The Member acknowledges that the Company has elected to be taxed as a corporation for federal tax purposes pursuant to the regulations currently in effect under Section 7701 of the Code, and to be taxed as an electing small business corporation under the provisions of Subchapter S of the Code. Notwithstanding such tax treatment, the Member acknowledges and agrees that the Company will be a limited liability company, for state law purposes, under the provisions of the Act, the Articles of Organization, and this operating agreement.
The Member acknowledges that the Company has filed or will timely file a Form 2553 (Election by a Small Business Corporation) with the Internal Revenue Service and that the election made pursuant to the filing is or will be in force and effect covering all periods since the date of this operating agreement. Except as otherwise provided in this operating agreement, during the term of this operating agreement and the continuation of the Company’s “S” corporation election under Section 1362 of the Internal Revenue Code, no Member shall take any action which would cause the revocation or termination of the Company’s “S” election (under Section 1362(a) of the Internal Revenue Code) and any attempt to take such an action will be null and void and without effect. Without limiting the foregoing, and notwithstanding any provision hereof to the contrary, any transfer or attempt to transfer any membership interest to any of the following will be null, void, and without effect:
(a) a person whose ownership thereof would cause the Company to have a number of Members and assignees of membership interests (shareholders of an “S” corporation) greater than the number permitted by Section 1361(b)(1)(A) of the Internal Revenue Code;
(b) an individual who is not a United States citizen or resident;
(c) a trust (or the trustee thereof) which fails to satisfy the requirements of Section 1361(c)(2)(A) or 1361(d) of the Internal Revenue Code;
(d) a corporation; and
(e)any other entity whose ownership would cause the termination or revocation of the Company’s tax status as an “S” corporation.
This section is like your LLC's piggy bank, showcasing when your company will distribute cash profits. For single-member LLCs, it's a no-brainer. However, for multi-member LLCs, you need to clarify the 'when,' 'how,' and the prerequisites for these distributions to take place.
As the sole member of the LLC, the Member is entitled to all profits of the LLC and is responsible for all its losses. Profits and losses shall be determined annually and will be allocated to the Member's capital account. Distributions of cash or other assets will be made at such times and in such amounts as deemed appropriate by the Member.
If the tides change and you need to modify any term in your LLC, have no fear—your LLC amendment clause is here. For single-member LLCs, this process is straightforward. But for multi-member LLCs, it's essential to craft a detailed strategy, considering critical aspects like voting percentages and amendment procedures.
This agreement and the articles of organization of the Company may not be altered, modified, or changed, and no provision of this agreement may be waived, except by an amendment or waiver, as applicable, approved by the Member.
Formalities are typically associated with corporations, not usually necessary for LLCs. Yet, failing to follow formalities could weaken your corporate veil's defenses. To prevent this, ensure a waiver of all formalities is included in your operating agreement.
The failure of the Company or the Member to observe any formalities or requirements relating to the exercise of its powers or management of its business or affairs under this operating agreement or the laws in the state in which the Company is which govern limited liability companies will not be grounds for imposing personal liability on the Member for liabilities of the Company.
In life, not everything goes as planned, and the same goes for your LLC. The dissolution section outlines the steps for dissolving your LLC and designates control in the event of your death or departure.
Upon the occurrence of any event which terminates the continued membership of the Member in the Company, the Company will not be dissolved, and the business of the Company will continue. The Member hereby specifically consents to such continuation of the business of the Company upon any such event. The Member’s legal representative, assignee, or successor will automatically become an assignee of the Member’s interest and will automatically become a substitute Member in place of the withdrawn Member.
The effective date is when your operating agreement comes to life. Also known as the day the agreement "takes effect."
Great news! Unlike your Articles of Organization, your operating agreement is an internal document living within your company's records. All you have to do is sign it and keep a copy, ready for retrieval whenever you might need it.
Every entrepreneur dreams of the day their business thrives beyond their individual capacity. If and when this day comes and you're ready to add another member to your LLC, all you'll need to do is redo the paperwork according to the new agreement between you and your partner. You'll most likely draft an entirely different agreement, as multi-member operating agreements differ significantly from single-member operating agreements.
