What is an Alabama LLC Operating Agreement?
In Alabama, the limited liability operating agreement specifies and details how the LLC will be managed and operated by a single member or by the multi-member LLC owners.
The LLC’s operating agreement is a contract between all of the members of the LLC. The LLC operating agreement identifies how the company will be managed, the members’ and business owners’ decision-making rights, how business profits and losses will be distributed between the members. (If your LLC is a multi-member LLC, the owners in Alabama are referred to as members).
Many other important considerations are covered in the Alabama LLC operating agreement too. Keep reading to learn more about these issues.
Alabama LLC Agreements: Overview
Alabama law allows written and oral operating agreements to determine how limited liability companies operate. However, written LLC agreements are always preferable to prevent potential legal issues or conflicts among the company members. The agreement should be structured as a contract.
It should be signed by all of the limited liability company owners or members.
The Alabama Operating Agreement should be very carefully drafted in order to ensure a smooth-running, successful business enterprise.
An LLC operating agreement also protects the members from potential future disagreements with each other or conflicts between different members and/or managers over important issues such as management decisions, ownership of property, sale of company assets, distribution of profits and losses, how much authority will be delegated to managers or key employees.
That's why these important matters should be clearly stated in the operating agreement.
Organization of an Operating Agreement
The operating agreement documents often include information about the business, legal name, its principal place of business, the date at which the LLC was formed, along with the name and address of the business’s registered agent.
The operating agreement should also contain the names and addresses of all members.
Multi-member LLCs may utilize an equal-share ownership structure or assign various members different units of ownership, based on their respective rights and obligations.
The decision of whether to run your Alabama company as a single member or multi-member LLC is something you should think hard about when setting it up in the certificate of formation with the Alabama Secretary of State.
Some organizations elect to be multi-member LLCs in order to spread the risk and liability between several members. Multi-member LLC entities will, thus, have more operating flexibility.
Having several members involved in your company gives the LLC a formal structure that is legally binding and easier to manage.
Management and Voting Rights of LLCs in Alabama
LLCs can be managed in Alabama by their members collectively or by an appointed manager, depending on how the members choose to delegate business authority. Absent special agreements, each member has one vote, but the members may choose to give some members more voting power than other members.
The LLC’s Operating Agreement should specify whether an owner will be considered as a manager or non-manager member of the company and what are the respective rights, privileges, duties, and obligations.
For example, managers may make critical business decisions, such as agreeing to a contract or purchasing real estate.
Non-managers may be prohibited from making any big changes to the company or accessing the business bank account.
Initial Capital Contributions Among Members
The initial contribution is the amount of money or other property that each member is invested in the business at its initial formation in exchange for their membership units in the LLC.
Initial capital contributions can be unequal if specified in the operating agreement. The specific amount of each member’s contribution should be specified in the LLC’s operating agreement if the amounts contributed are not equal.
Some companies may decide to have at least two different classes of ownership units for their members who will not contribute equal amounts of money to start up the new business but will still be involved in operations after filing the certificate of formation for the LLC.
The operating agreement will often also establish how the business will deal with any future needs for additional funding and member obligations to contribute. The voting rights can be changed to reflect these changes.
Distributions from the LLC
The operating agreement should specify the procedure for withdrawing money from the company. This section of the agreement determines how the profits and losses of the business will be divided between the members of the LLC in Alabama.
Distributions should be made annually (or more frequently) in proportion to members’ respective ownership percentages. The operating agreement may also specify a minimum or maximum amount that may be distributed.
Distributions from the LLC may come in the form of cash payments, property, or other benefits to a member.
Some businesses choose to limit distributions of profits each year, particularly if they are being highly successful. This can be done by implementing a 'capital account' system for each member.
The capital accounts of each member can be credited with their share of LLC profits from the most recent fiscal year. In the event of a withdrawal from the business, members’ capital accounts can be reduced to reflect their share of any net losses.
The most common approach is to distribute profits evenly between the members. However, Alabama law allows for different treatment if stated in the operating agreement. For example, profits could be distributed in proportion to the amount of contributions made by members.
Changes in the LLC Membership Structure
Operating agreements will often detail the members’ roles and how ownership will be transferred or redeemed if a member leaves the business or is dissociated from the LLC in Alabama.
The operating agreements will also specify the rights of non-members or assignees, which can be critical if the business accepts investors or anyone that is not a member.
Membership distributions may be based on sweat equity (work performed for the company) rather than money invested in dollars, thereby granting certain members more voting power and other privileges to make decisions about company operations.
For example, an initial mission statement might say they are “a group of people” forming a limited liability company.
The Operating Agreement needs to state whether these participants and their corresponding percentages are established at formation with contributions from each participant necessary before LLC can commence its activities or whether additional individuals can join as new members over time without any capital contribution being required.
Dissolution of the Alabama LLC
It is important for Alabama LLC operating agreements to specify the process for winding up operations and shutting down if the members decide to close the company.
The operating agreement should detail how the assets of the business will be divided between members. This is determined by a process called “winding up” or “liquidation” of the Alabama LLC. Alabama law states that an LLC can only dissolve if all of its members agree to dissolve and terminate their membership interests in the company.
Detailing the processes and procedures for a hypothetical future shutdown of the business is an important concept to include in the LLC operating agreement.
If the members do not agree to dissolve the company, they may be able to force a dissolution in court through an action known as judicial dissolution.
Alternatively, after an Alabama LLC has been dissolved and its assets have been sold, remaining profits can be distributed to the members or held in trust for them by the business’ registered agent or attorney.
Alabama Probate Property
The members’ ownership interest in a Huntsville LLC is considered personal property in Alabama, and transfer of a deceased members’ interests may be subject to the Alabama probate process.
The structure of LLCs, however, makes them an attractive vehicle for transferring assets that should avoid probate. Ownership interests in a Huntsville LLC can be transferred quickly and easily by way of private sale giving the new owner full voting power and equal rights to receive distributions.
The operating agreement can address the designation of a beneficiary or beneficiaries who will be entitled to receive distributions from LLC assets upon the death of an owner.
If the LLC was formed out-of-state, a review of applicable probate laws in that state may be needed to ensure compliance.
Contact Us Today
An operating agreement is an important document for your Alabama LLC that details what members can and/or cannot do in the company.
Our Huntsville, AL law firm can help you form your LLC and provide you with all of the legal documents necessary to ensure that your company operates according to plan.
Contact us today to speak with Sarah S. Shepard about the formation of your Alabama LLC and drafting an LLC operating agreement.