Illinois LLC Operating Agreement | Why is it Necessary and How to Draft It?

If you just formed a new limited liability company in Illinois, you may want to set forth some important rules and regulations related to business operations. But how do you do that? This is where an Illinois LLC operating agreement comes into play. Firms draft this document to highlight ownership, different roles, and responsibilities of various individuals.

It is important to understand the details of how to write an operating agreement. Hence here is our guide to help you through the process and its other details.

What is An Illinois LLC Operating Agreement?

An Illinois LLC operating agreement would be your company’s legal document, covering details related to ownerships, different positions, their responsibilities, and operating procedures of your business. It mainly highlights the ownership structure, voting rules, and how profits will be distributed among the members.

Associated individuals of your LLC have to sign the agreement in order to make it valid and legal. If in the near future, you want to revise your operating agreement, you can do so but will again need the signatures of all your members.

Importance of Illinois LLC Operating Agreement

Your LLC operating agreement is written proof of important terms that owners, managers, and members are agreeing to. These signed agreements are absolutely necessary and here’s why.

  1. Operating agreements can easily solve internal conflicts between owners/business partners. It redefines clear roles & responsibilities for each business partner in the early stage, thereby preventing misunderstandings in the future.
  2. If you own a single-member LLC in Illinois, an operating agreement helps to maintain your limited liability status, thus adding to the credibility of your business.
  3. Illinois business statutes recommend every LLC in the state have an operating agreement to govern their operating procedures.
  4. In any legal case between LLC members, operating agreements could be vital proof during court proceedings.

Are Operating Agreements Mandatory in Illinois?

An Illinois LLC operating agreement is great for protecting your business operations. But it’s not a mandatory document in any way. It remains an internal document, you don’t need to submit it to the Illinois secretary of state.

It’s worth mentioning that the Illinois business statute 805 ILCS 180/15-5 recommends drafting this piece of paper for obvious reasons. Here are a few of them.

  • This document helps a business create its own set of rules.
  • Without it, all Illinois businesses are subject to the default state laws.
  • It also prevents disputes and lawsuits that could ruin your reputation.
  • It manages a company’s internal affairs.
  • Secures personal possessions of all members.

What Should An Operating Agreement Include?

In a way, you can include almost anything in the Illinois LLC operating agreement as long as it abides by Illinois state law. Before you start with this, you should know how to start an LLC in Illinois, after which you can focus on your LLC’s internal document i.e. operating agreement.

Illinois operating agreement

1. Business Info: Some basic company details, i.e. the name, related industry, what products/services you offer, and main office address. While at it, make sure that your company name is unique by doing an Illinois business entity search.

2. Ownership Structure: Mention all the members/partners of your LLC and how ownership is distributed. Multi-member LLCs can have equal or varying levels of ownership among all the members.

3. Management Type: Specify the management structure of your business. An LLC could be member-managed or have a specific manager.

4. Voting Rights: Clarify voting rights. Each member may have equal voting power but with mutual agreement, some individuals can have more or less voting power.

5. Initial Contributions: If the capital cost contributed by each member is different, write that down too. These numbers can always be revised as your business grows down the road.

6. Positions & Changes: Describe the roles and duties of all members. Here you should also mention how ownership and roles will change if a partner wants to leave or retires from the company.

7. Profit/Loss Distribution: You should also note down how members will share profits and losses. Whether you want to share profits evenly or in a specific way, you should specify in your Illinois LLC operating agreement.

8. Dissolution: An LLC needs to be dissolved if the associated members don’t want to continue the business. So map out a hypothetical plan for LLC dissolution. It should also include who walks away with how much profit or loss.

Regardless if it’s for a single-member or multi-member LLC, your operating agreement should include all the above specifics. Some of the terms aren’t that necessary for a single-member LLC but you can still include them if you want to partner with some individual in the future.

Are Operating Agreements a Public Record?

Contrary to your Illinois Articles of Organization, operating agreements are not a part of Illinois public records. You don’t have to submit it to the Illinois secretary of state which means anyone other than the members cannot access it. It remains an internal document in your company records.

All the members have to acknowledge all the agreements and sign the document, which acts as legal proof.

Who Can See My Operating Agreement?

As we said, you don’t have to submit operating agreements with the Illinois secretary of state. But you may need to show it to future investors or banks to open your business account. Besides that, you may also need it for tax officials or the court may also ask you for your operating agreement in the event of legal action.

Why to Professionally Draft LLC Agreement?

Operating agreement drafting

You can find plenty of resources to draft your Illinois LLC operating agreement. You may also draft one yourself, especially for a small-time business involving only a few members. But professional help is always advisable to prevent mistakes.

Any misleading detail regarding ownership, shares of profits, and investments could cause major conflicts between members. A professional also won’t miss any important agreement that needs to be specified in the document.

How Much Will Illinois LLC Operating Agreement Cost?

If you want to professionally draft your LLC agreement, there are many professional services available online. On average, it’ll cost you anywhere from around $350 to $500. Your Illinois registered agent or business organizer (if any) who helped you officially form your LLC can also help you.

If the cost doesn’t fit your budget, it’s advisable to sit down with the members to create your own operating agreement.

Can I Revise an LLC Operating Agreement?

Yes, you can easily make changes to your LLC’s operating agreement if all members have consented to it. Any changes related to a member’s position, ownership, or profit distribution have to be documented in written form and signed by all the members.

What If I Don’t Have an IL Agreement?

An operating agreement is surely not mandatory, but it is a very effective precautionary measure to protect your business. Internal conflicts are natural to businesses, but you won’t always be able to prevent them without an operating agreement. It also reinforces the limited liability status of all the members. The absence of an operating agreement could be a huge blow if your LLC is taken to the court.

Besides, you need to keep your business and personal finances in a separate account. But most banks won’t allow you to open a business account without an operating agreement.

Frequently Asked Questions

1. Is an operating agreement mandatory in Illinois?

No, Illinois law doesn't require LLCs to have an operating agreement. However, it is recommended to have one to prevent and resolve disputes within the members.

2. How does an operating agreement help single member LLC??

Operating agreement is a proof that a business is a separate entity with limited liability protection. Without it, a single member LLC can be confused with a sole proprietor without limited liability which can cause trouble during the lawsuit.

3. When should I draft my operating agreement?

You can draft your operating agreement both before or after filing the Articles of Organization for your LLC.

4. Can I write my own operating agreement?

Yes, for a small time or single-member LLC, you can draft this document without any professional help. But make sure to get it reviewed by a professional

To Sum Up

Your Illinois LLC operating agreement would prevent major issues that could put your reputation at stake. With all the details that you can include and revise regularly, it’s the easiest way to solve internal conflicts between members. This is why multi-member LLCs draft this document even when most states don’t mandate it.

Leave a Comment