An amendment to an LLC operating agreement is an internal, written document that identifies which sections of the original Limited Liability Company (LLC) Operating Agreement will be modified or removed, or new sections to be added.
Before creating the amendment, review the original operating agreement to assure that it can be amended by the owners, and if there is a time frame or limitation for creating an amendment. For example, the original LLC operating agreement might state that it:
- Cannot be amended; or
- Can only be amended by a unanimous vote of the owners; or
- Can be amended by a majority (simple, 2/3rds, etc.) vote of the owners; or
- Can only be amended after the first year (or other time frame) of operations; or
- Can only be amended in the fourth operating quarter of each business year.
Any limits or procedural requirements to amending an LLC operating agreement must be followed for the amendment to be legally binding.
1. What Should an Amendment to an Operating Agreement Include?
A simple LLC Operating Agreement Amendment should generally have at least the following:
- The number of this amendment, i.e. the first amendment, the second amendment, etc.
- Identification of the original owners
- Identification of the current owners
- The location of the business
- The provisions being amended or changed
- The provisions being eliminated or replaced
- The new provisions
- The date the amendments go into effect
- The signatures of the owners.
Additional details can be useful in this document including:
- Governing Law: which state’s laws apply in the event of a dispute
- Original Agreement: a copy of the original agreement should be attached to the amendment since the non-modified terms are still in full force and effect.
- Counterparts: when the owners cannot gather to sign the document, separate signature pages, or counterparts, may be used to complete the amendment process.
Amendment to LLC Operating Agreement Sample
The amendment to LLC operating agreement sample below details an agreement between the two members of ‘ABC, LLC.’, ‘Jesse L Melvin’ and ‘Kyle J Delgado’. The two agree to amending certain provisions of the operating agreement they had previously signed.
An Amended and Restated LLC Operating Agreement is an agreement that has been amended (changed) one or more times, but is now restated with the amendments incorporated into the operating agreement. This document helps to streamline the document and clarify its provisions.
2. When an LLC Amendment is Needed
Owners should amend their LLC Operating Agreement when its terms no longer reflect the responsibilities of its members, operations of the business, or asset contributions. Over time, the roles of specific owners are likely to change due to growth, shift in business focus, or skill set. As the business grows, a more formal, hierarchical structure may be best for managing day-to-day operations and long-term development. Also, some owners may invest additional capital into the company to support operations, and their individual investment must be acknowledged and protected. As these situations arise, an amendment to the original agreement is necessary.
You do not need to amend the LLC Operating Agreement every time a small change is made. Instead, assign an owner to track needed alterations to the agreement and address these issues in a single amendment process.
3. The Consequences of Not Using an Operating Agreement Amendment
An Amendment to an LLC Operating Agreement is essential to reflect the current operations of the company, as well as the responsibilities and ownership shares of the business members. In the absence of an amendment, the original operating agreement stands as the valid contract between the parties, and only the terms included in that agreement will be applied to disperse profits or make management decisions.
In this situation, new partners will not be entitled to any assets if the business is dissolved, and those partners who invested additional funds or assets will not receive compensation commensurate with their contributions. In addition, former owners could legally be entitled to receive the share of assets they were assigned in the original agreement, despite their absence from the company.
The LLC is more likely to fail or be dissolved in situations where the original LLC Operating Agreement does not reflect current ownership structures and member responsibilities. Without an amendment other issues, such as leadership shifts and profit-sharing changes, cannot be enforced in a court of law.
Disputes between owners will only be settled as per the original agreement, regardless of whether current operations are inconsistent with that document.
Drafting and ratifying an LLC Operating Agreement Amendment is not difficult or time-consuming, making it easy to provide legal protections to all of the owners.
4. Most Common Operating Agreement Amendment Situations
The LLC Operating Agreement Amendment is used whenever there is a change to the original agreement, either modifying existing terms or adding new ones as needed. It is most often used when:
- An owner leaves the business
- A new owner is added to the business
- There is a change in the timing of distributions
- There is a change in the percentage allocations of distributions
- Additional capital is invested in the business
- There is a change in voting rules in general or for a specific decision, i.e. unanimous consent or majority vote
- Other managerial or financial changes that differ from the original Operating Agreement
The LLC Operating Agreement and any existing Amendments should be reviewed on at least an annual basis to determine if additional amendments are required.
There are two LLC management structures: member-managed or manager-managed. Make sure to keep all relevant parties up to date with changes.