Michigan LLC Operating Agreement: Why and How to Get One

Is an LLC operating agreement required in Michigan?

Michigan law does not require an operating agreement. Neither does the Michigan Secretary of State, the Michigan Corporations Division, or the Michigan Department of Licensing and Regulatory Affairs (LARA). It's entirely optional.

But, the state's courts will honor operating agreements between members in the case of conflicts. In fact, as per the Michigan Limited Liability Company Act (MI § 450.4215), even a single-member operating agreement is valid and enforceable.

Investing time and effort into drafting an LLC operating agreement certainly pays off in the long run. This written agreement is an effective guide for business decisions that also minimizes the chances of disagreements and conflicts between LLC owners and helps avoid unwanted financial repercussions. 

Benefits of having an MI operating agreement

Many aspiring business owners overlook the importance of an operating agreement as they get ready to form their Michigan LLC because it's not legally required. However, an operating agreement serves multiple functions and can be a strong guiding force for your business.

Here’s what an operating agreement does for you:

• Strengthens legal protection. A Michigan LLC operating agreement is instrumental in identifying your company as a business entity separate from your personal finances, thereby limiting your personal liability in the face of company debts and legal cases.
• Clearly communicates agreements. You and your business partners may verbally agree on how things should be done, but if a dispute arises on an issue like profit distribution, you can find yourself in a he-said-she-said argument. Spoken words are difficult to prove in court. A written operating agreement puts agreements into a more formalized and legally binding contract.
• Provides operational guidance. A well-written operating agreement defines the operations of your company, the decision-making processes, the election of manager(s), the conditions for reinvesting funds, the entry and exit of members, and the distribution of profits and liabilities. Drafting an operating agreement and thinking through all these "what-if" scenarios minimizes future conflicts.
• Aids in banking and financial transactions. Michigan LLC formation laws allow you to keep members' names off of the articles of organization. The operating agreement, which includes the names of all members and their contributions, proves who owns the company—something that's necessary when you seek funding from financial institutions or investors.
• Overrides state's default laws. The agreement provides a way to avoid the state's default rules (MI § 450.4101-450.5200) and maintain maximum control over how the LLC runs. For instance, you may be the main manager and contribute 75% of the LLC's funds, while your partner contributes just 25%. In case of a dissolution without an operating agreement, Michigan state laws will distribute the profits as 50/50 between the two unless your operating agreement dictates another arrangement.

Key components of a Michigan LLC operating agreement

In Michigan, your LLC operating agreement can include a variety of provisions and clauses, as long as they don't break the law. Below are critical components that should definitely be a part of your Michigan LLC operating agreement.

LLC general information and intent

The initial portion of the agreement should mention basic information, such as:

• LLC name and primary address
• Registered agent information
• LLC formation date (if articles of organization have been filed with the SOS)
• LLC duration (if you have specified a termination date on formation documents)
• Business purpose

Most operating agreements include a statement of intent that states that the LLC is or will be formed in accordance with Michigan state laws.

Member information and initial capital contributions

Mention all member information, such as their legal names and their capital contributions. Also, mention the kind of capital contribution they made—cash, property, promissory notes, or services performed. This will assist in identifying each person's ownership percentages. The section can also address how future capital contributions can be made.

It's also helpful to explain how new members can be added to the LLC and whether they'll require approval from the founding members.

Management structure and member obligations

Your LLC's management structure can influence its operation and tax obligations. By mentioning the management structure—either member-managed or manager-managed—in your LLC operating agreement, you are setting the record straight on who has the authority to handle daily matters, make decisions, and represent the company. Detail out the powers and limitations of managers. In a manager-managed business structure, talk about how managers will be selected or removed.

Beyond stating the management structure, the agreement should also outline the duties and responsibilities of both members and managers. This reduces ambiguity and protects the interests of the involved parties. For instance, in a multi-member LLC, it's helpful to mention whether all members need to attend quarterly review meetings or perform specific tasks.

Voting rights and procedures

As per Michigan statutes (MI § 450.4405), each member gets one vote, and decisions are based on a majority vote. If you feel the state's rules don't suit your best interests, you have the power to use your operating agreement to define different voting powers. 

In addition to mentioning how you’ll distribute voting rights, mention when these meetings will occur and which issues call for a vote. For instance, many LLCs will require a vote before they can:

• Add or remove a member
• Appoint or remove a manager
• Change LLC's tax status
• Change business structure—go from an LLC to a corporation or partnership
• Merge, sell, or dissolve the company

Profit and loss distribution

This portion of the document dictates how members will split profits and losses. Do you want to share all equally or as per each member's contribution?

When it comes to profit allocation, outline how and when distributions will occur—quarterly or annually? Does a member have the ability to make a direct deposit from the business bank account to their personal account?

Likewise, how will members contribute additional capital in case of losses or debt? Again, will the debt be split equally or by ownership percentage?

Transfer of membership interests

Operating agreements should also contain terms pertaining to buy and sell arrangements between the LLC’s members. Define “triggering events” that will allow members to buy out other members. Common triggering events are:

• Death or incapacity
• Member's bankruptcy
• Voluntarily withdrawal
• Divorce
• Failure to make capital contributions
• Conducting wrongful acts against the LLC

It’s also worth integrating succession planning into this portion of the agreement. Succession planning explains who will take over the departing member's ownership interest and management responsibilities. It ensures business continuity even when a key member leaves.

Accounting method and tax status

In the agreement, define which accounting method, cash or accrual, will be adopted by your Michigan LLC. Also, highlight how financial records will be kept and who will have access to them. Doing this makes it simpler to track income, expenses, and profitability. 

An LLC business structure offers flexibility when it comes to taxes, as well. Members can vote to have the LLC taxed as a pass-through entity, C corp, or even an S corp. Agreeing on this beforehand ensures everyone understands their tax obligations and files taxes correctly.

Dissolution process

Mentioning the dissolution process is essential to legally closing the business while maintaining clarity on how things will end. Alongside mentioning the exact steps to close the company, such as calling in for a meeting and voting, highlight events that "trigger" a dissolution. These events could be:

• Achievement of a goal
• LLC reaching its termination date
• Bankruptcy
• Death or incapacity of a member

LegalZoom makes LLC business dissolution stress-free. We can tie up all the loose ends neatly so you can avoid state penalties and be free from ongoing compliance requirements.

Amendment process

Your operating agreement is a "living" document that should be revisited to ensure it continues to serve everyone's best interests. We recommend reviewing your Michigan LLC operating agreement around the same time you file your annual report.

The agreement must reflect important changes in your company's ownership, core activities, management structure, and/or member information. Therefore, it's also necessary to highlight a clear process for making amendments. For instance, many LLCs call for a meeting and majority vote before modifications are approved.

How to create a Michigan LLC operating agreement

A properly drafted LLC operating agreement can actually be the difference between going to court and settling conflicts without unwarranted stress and financial consequences. Here's how to go about drafting your Michigan operating agreement.

Step 1: Gather member information

The operating agreement drafting process kicks off with getting all member details. You want to have each member’s complete legal name, address, and primary contact number. Ensure you have all the information on each person’s initial capital contribution correctly, such as what form of contribution they made and the date of the contribution.

You’ll also want to gather other basic information about your LLC, including formation date, business ID number, registered agent contact information, and any DBAs.

Step 2: Decide on the management structure

Next, you’ll define your management structure. An experienced business lawyer, like one from LegalZoom, can provide valuable insight into how each structure differs and which is best for your business.

In Michigan, a member-managed LLC is one in which all the LLC owners are involved in the organization’s daily operations. In a manager-managed LLC, owners appoint one or more managers to run the ship. The owners then decide how much authority the manager has.

Step 3: Draft the agreement

A Michigan LLC operating agreement is a legal document—you’ll want to get it right to avoid surprises and unintended consequences. You can use one of LegalZoom’s customized operating agreement plans to draft your agreement.

Step 4: Review and revise

Once the first draft is created, distribute a copy to each member and give them sufficient time to review the terms, at least a week or two. Encourage members to carefully read each point, consult with their personal attorneys, and get back with any questions or clarifications. You can also schedule a meeting to discuss any necessary changes. Incorporate any agreed-upon changes to the draft before making a final copy.

Step 5: Sign and distribute

If everyone is satisfied with the Michigan LLC operating agreement, it's time to make it a binding contract. When each member signs the operating agreement it becomes legally binding that serves as a set of rules that all members must follow.

Distribute a copy of the signed agreement to all members for their personal records. Keep the original copy alongside any other important company paperwork. In addition to physical copies, consider digital copies as they are easier to store and reference.

Get a Michigan LLC operating agreement with LegalZoom

At LegalZoom, we understand each Michigan LLC is unique and we can help you draft an LLC operating agreement that aligns with your business needs. Our lawyers will clarify legal terms and member rights, thereby reducing the risk of disputes and personal liability. Our extensive experience in working with small businesses means we’ve seen it all. We can help you avoid future conflicts and guide you on incorporating protective provisions that will keep your business safe.

FAQs

Can I write my own LLC operating agreement in Michigan?

The short answer is yes, Michigan state allows you to write your own LLC operating agreement. But the more important question is: Should you create your own operating agreement? There's a lot to consider in an operating agreement and while you can certainly take the help of online resources like LLC operating agreement templates, they tend to be generic and might not serve your business interests.

Does a single-member LLC require an operating agreement?

No, single-member LLCs don't necessarily need an operating agreement, but it's certainly beneficial to have one. The single-member LLC operating agreement further establishes your company's limited liability status and protects your personal assets from business liabilities. It also establishes credibility in the eyes of investors, clients, and vendors.

Does a Michigan operating agreement need to be filed with the government?

No, you do not need to file your operating agreement with the state authorities, like the Michigan Division of Corporations or the Michigan Department of Licensing and Regulatory Affairs.

How do I update my limited liability company's operating agreement?

The process to update your Michigan operating agreement is typically mentioned in the original agreement. If it isn't clearly stated, the process usually calls for voting on the changes and then incorporating them into the written document. Just like the original agreements, amendments need to be signed by all members before they can be formally adopted.

It's smart to enlist the help of a legal professional to guide you on how to make the necessary amendments so they are valid and enforceable.