What is an Operating Agreement?
An operating agreement is a foundational governing document for your business or LLC. It outlines the management structure and operating procedures of the company. It broadly addresses how decisions are made within the business, who makes them, and how to resolve conflicts. While an LLC operating agreement is not required in every state, it is a vital part of organizing your business. If anything happens that requires business dissolution, or if the company has a financial interest in a legal action , the operating agreement often serves as the basis for a legal interpretation of how the company is to be managed and how it is to be dissolved.
Although every operating agreement will differ from others in some way, they typically include the following core components: The operating agreement is a very private document that serves as the basis for how your business operates. Depending on the jurisdiction of your LLC, the operating agreement is kept private and is not part of the public record.
What Does “Public Record” Mean?
Public records are documents or pieces of information that are not confidential and are generally maintained by government agencies. While the exact definition of a public record varies from state to state, public records have traditionally included things like emails, transcripts, police reports, court filings, and public meeting minutes.
When a document is public, in most cases, this means that, pursuant to a proper request, the relevant agency must provide a copy of the document. There are some exceptions: certain documents may be withheld in limited circumstances. For example, personally identifying information on a contract might be kept private because of an individual’s right to privacy. Or, as with certain attorney-client-type communications, a document’s confidentiality could be protected if it was made to facilitate the attorney’s provision of legal advice. A tax return (even regarding a business) might be accessible to the public, but it cannot be copied and widely shared (as a notice was issued this past spring).
While operating agreements are generally not public by default, there are a few situations where they might be considered public records. For example, if a contract is required to be filed with the IRS (such as in the case of certain 501(c)(3) nonprofits), it is considered public record. Similarly, operating agreements for many limited liability companies (LLCs), especially in states like Delaware, are required to be filed with the state agency. Recent Articles of Organization for South Carolina LLCs also now require a provision that sets out the entire operating agreement as an attachment. In addition to registers of corporations, state agencies might require copies of limited partnerships and partnerships to be filed. Early on, states did not require the filing of these documents, but most now do.
Despite the relatively few situations where they are considered public records, there are some circumstances where copies of and information about an operating agreement (or other business document) might be made available to the public.
Are Operating Agreements Public?
This is another critical question that a lot of LLC owners have. Operating Agreements are typically not public records, so you do not need to file them with your Secretary of State or whoever handles business filing in your state. But of course there are exceptions, and laws vary by jurisdiction.
In a handful of states, including Florida, you need to make your Operating Agreement a Florida business record. In Florida, you’re required to make a copy of your Operating Agreement’s "main provisions" part of the public record.
Delaware LLC owners also have to file a Public Limited Liability Company Agreement (PLLA) – that’s a step of licensing that has to be taken when creating an LLC in Delaware. However, this is basically like asking a Florida business owner to file a copy of their license and a copy of their Corporate Resolution, and is hardly about privacy.
Most states, however, require that you have a written Operating Agreement but do not have any further requirements to file it. Next, some states require you to provide a copy of your Operating Agreement to your Members.
One state that requires a copy of your Operating Agreement to be provided is Michigan. When registering to do business in Michigan or LLCs formed in Michigan, you have to give the state a copy of your LLC Operating Agreement.
It’s likely you might not want to provide 3rd parties with a copy of your LLC’s Operating Agreement. This is something to keep in mind when determining the privacy level of your LLC.
As mentioned, most states do not require you to file your LLC’s Operating Agreement. However, don’t be surprised if you’re asked to keep a copy available for any Members of your LLC that would like to have one. Having a copy is not a legal requirement for LLCs in most states, but rather something that may be asked of you occasionally.
Variations in State Laws
Whether operating agreements, also known as limited liability company (LLC) agreements, are considered public records is largely a matter of judicial and regulatory discretion. To make matters more complex, many states have numerous agencies handling the filing of corporate formation and tax documents.
California: In California, operating agreements are not required to be filed, nor are they considered public records. Nonetheless, they can be requested by the state’s Franchise Tax Board when they relate to a California entity.
Florida: Unlike California, Florida does not require operating agreements to be filed with the state’s Secretary of State. Nevertheless, the Florida Department of Revenue requires such agreements to be made available upon request if they pertain to an entity formed in Florida.
New York: Those seeking to make relatively simple alterations to their operating agreements are legally obligated to file amendments with their Secretary of State. However, such amendments are not publicly available, so amendments are more likely to be found in the Revised Organization Certificate once the initial filing is completed.
Texas: Similar to the two aforementioned states, LLC operating agreements in Texas are not considered public record. Furthermore, these documents can be requested by the state’s Comptroller of Public Accounts if they concern a Texas entity.
Delaware: Contrary to the information provided above, Delaware requires the filing of LLC operating agreements. Such documents do not automatically go into the public record, unless Delaware’s LLC Act requires as much. Nevertheless, demand for copies of company agreements from Delaware’s Division of Corporations is generally granted.
The Importance of Privacy in an Operating Agreement
While establishing a limited liability company (LLC), one of the critical factors to consider is the privacy of your operating agreement, which describes the company’s management structure and rules. Important confidential information found in the operating agreement includes a list of the owners, member voting systems, and the proportions of each member’s ownership. Additional developing details in operating agreements may also contain the members’ salaries, bonuses, and profit distributions. Much like other corporate documents – articles of incorporation and/or organization, partnership agreements, business records, financial details, etc . – an operating agreement is part of a company’s private information that may only be needed internally or in orders of the court.
Legal representatives for companies that file under a corporation type of business entity usually use a combination of legal and business documents to formalize the internal process of the organization. Owners maintain important details of their companies by keeping different aspects of the internal organization out of the public’s view. Likewise, a company’s operating agreement can be important for owners to control what information to disclose, because once entered into public records, it may be challenging to reverse the situation.
The Effects of a Public Operating Agreement
Publicly available operating agreements could have significant legal consequences. For one, if individuals know the details of the business they partner in, they may be more liable and subject to legal action in the event that the business faces a lawsuit, is sold, or has an accident.
If no one knows the details of the business and there is an accident, the individual partners are less likely to be sued, or rather, less likely to be sued successfully, than if the partnership were public knowledge and the operating agreement were public record. In that case, they might be more likely to lose their personal assets in the case of a judgment against the company than if the opposing party could only go after the business’ assets.
The individual might be more likely to be named personally in a lawsuit if the lawsuit has to do with a sale of the business or other modifications to the company’s operations that would not have occurred if the owners were not so easily found by the other parties in the lawsuit. Plaintiffs associated with car accidents will try to find deep pockets in order to collect, and if your name is known publicly as a partner in a car rental company, your assets can be in danger from plaintiffs’ lawyers. This is all the more serious if you are in a plantation state such as Louisiana, where the "tortfeasor" who causes the accident is judged for his or her ability to pay for the mistake instead of the negligence which caused it.
The business will be less likely to be defended against claims such as patent infringement, if it is publicly known as renting machines that infringe on other companies’ patents. A company might pay its way out of a patent infringement lawsuit by giving the other party a licensing agreement, but if the company is unknown, the licensee is more likely to be awarded significant damages if the patent infringes upon the company’s investments and revenue streams. Other companies might be less likely to make motions to be considered friends of a defense in a case if they do not know of the other company’s existence and are unsure of its legal capacity.
On the other hand, if the operating agreement is made public, the business will be taken more seriously. Since the publication of names associated with the business is a signal that the business is more legitimate, it may obtain more clients and make more revenue than it would otherwise. Perhaps even more important than the benefits of private citizens’ opinions on its legitimacy, if the business is a partnership (which by definition has more than one owner), its operating agreement must be made public if it wishes to be an LLC in a state such as Texas. A partnership must be a limited liability company.
How to Protect Your Operating Agreements
Business owners should be proactive in safeguarding the confidentiality of their operating agreements. Especially considering many states provide a mechanism through which an LLC can avoid public disclosure of its operating agreement. When compared to the procedure for other business entities, an LLC has a unique approach that allows for greater confidentiality of its operating agreement if it is drafted into the document as part of the Articles of Organization. So long as the operating agreement contains terms to avoid disclosure, the operating agreement may be kept as a private document and not included in any public filing. Specifically, the Delaware LLC Act contains a provision that allows the operating agreement to remain confidential, so long as the document is included in a written resolution to that effect (See 6 Del. C. Section 18-305 (c)). This strategy has proven effective in preventing the disclosure of financial information for many national and international businesses that take advantage of the Delaware LLC statutes . However, the legal requirements for confidentiality do not prevent a court from having the final say over whether it will recognize confidentiality claims if the matter proceeds through the court system. As such, litigation is necessary to determine if the confidentiality protections will be upheld. For any new business, the benefits of confidentiality may outweigh the risks of proceeding in an unfamiliar legal system and disclosing information that could be revealed through the process, especially when trade secrets or proprietary information could be disclosed. Regardless of any case law pertaining to the disclosure of operating agreements, it is useful for all companies to discern what information they must keep confidential, what information they can keep confidential for a limited time, and what information they must retain permanently for legal and accounting purposes.