Drafting a Bulletproof LLC Operating Agreement in Kentucky

What Is a Kentucky LLC Operating Agreement?

An LLC operating agreement is a fundamental document that will establish a Limited Liability Company’s work and life. Members of the LLC will rely on the provisions in the operating agreement to establish and enforce their rights during the LLC’s existence and during the winding down phase of the LLC after dissolution. An operating agreement for an LLC may be considered a combination of a partnership agreement and a corporation by-laws but standard LLC Industry practice over the last 10-15 years has been to have the LLC operating agreement mirror a by-law so that the two corporations in the LLC can refer to the by-laws when interpreting the operating agreement.
Many states do not require an LLC to have an operating agreement . However, if it does not have one, then the provisions of the state statutes will govern the operation of the entity and its members. In Kentucky, the Kentucky LLC law at KRS 275.170 provides for the default rules for many issues under the Act if the LLC does not have an operating agreement or if it has an operating agreement but the specific topic in question is not addressed.
As with any other business document, the negotiating process often shapes the final form of the document. However, an operating agreement is just as much a negotiating tool as it is a way to bind the members to the terms of the agreement as the LLC conducts its business. For this reason, it is important to have a professional draft the operating agreement so that both the legal and business consideration relevant to the deal can be properly incorporated into the document.

The Importance of a Kentucky LLC Operating Agreement

The reasons behind having an Kentucky LLC operating agreement often come down to one thing: protection. An operating agreement is a contract among the owners of the business, and is the primary way to prove that the limited liability company is a well-run Kentucky business.
When an LLC has properly drafted operating agreement, it is much easier to convince a Kentucky court that the business is a separate and distinct entity from its owners. Many of the people we talk to who use our Kentucky LLC operating agreement templates have some sort of risk in their business. If any of those managers or members of the LLC are ever sued for personal debts, the operating agreement will help keep the assets of the Kentucky company safe from the personal creditors of the individual owners of the Kentucky LLC.
Further, an LLC operating agreement will help you manage the internal issues that may arise within the Kentucky business. Not all owners agree. Sometimes owners change. Some members of an LLC may even begin to question the loyalty of the other members. A good Kentucky limited liability company operating agreement provides solutions for all of these issues and even more.

Essential Elements of a Kentucky LLC Operating Agreement

Essentially, the operating agreement is a contract between the members of the LLC. Various topics should be addressed to create a strong document that sets expectations, clearly defines member roles, and helps ensure compliance with Kentucky law.
The basics
Information that should be included in the operating agreement is: Properly establishing the legalities of your limited partnership can save you headaches later. Amending your LLC operating agreement over time can become a nuisance, so getting an early start on the details makes good sense.
Member roles
When forming an LLC, Kentucky law requires a minimum of two members. But a limited partnership operating agreement must also set member roles. Members in an LLC have no personal liability for the debts or liabilities of the LLC. Some members can, however, play a role in the management of the LLC. Having clear guidelines for each member’s role and responsibilities prevents arguments down the line. For example, one member may handle administrative work while another focuses on client relationships. Without documented roles and responsibilities, disputes can arise over unexpected issues.
Financial arrangements
Members share the profits and losses of the business, so it’s important to include details about how funds will be distributed. An LLC operating agreement may also include details on member salary or draws, die value of member pensions, death benefits, and pension distribution upon the death of a member.
Voting rights
Voting is typically determined by the number of members or amount of capital. A specific percentage of votes may be required to address certain decisions involving company business. These details may be included in the operating agreement or in a separate company policy handbook.
Meeting protocols
The LLC operating agreement should include meeting protocol. Members might decide to hold monthly or quarterly meetings. Guidelines are needed on where meetings can be held, whether virtual meetings are acceptable and how notice of meetings should be given.

Tailoring Your Operating Agreement to Kentucky Laws

In drafting an LLC operating agreement in Kentucky, it is crucial to align the document with both federal laws and Kentucky-specific regulations. Complying with Kentucky statutes ensures that the operating agreement is valid and enforceable under state law.
In Kentucky, an LLC operating agreement serves as the primary document for determining the management structure, member contributions, and profit distribution, among other important aspects of the company. Therefore, it is essential to customize the operating agreement to conform with Kentucky law and address the particular needs of the business.
When creating an operating agreement in Kentucky, it is important to consider:

• Members’ rights and obligations: Address specific roles, responsibilities, and authorities of each member or manager.
• Management structure: Clarify whether the LLC will be member-managed or manager-managed, and detail decision-making processes.
• Profit and loss allocation: Outline how profits and losses will be allocated among members, as per Kentucky Revised Statutes (KRS 275.185).
• Capital contributions: Specify the required contributions and obligations of each member, including financial investments, property, or services.
• Indemnification and liability protection: Include indemnification provisions to protect members and managers, in compliance with KRS 275.237.
• Amendments: Outline how and when amendments can be made to the operating agreement, as per KRS 275.195.

While there are no extremely unique Kentucky regulations to consider, all general requirements listed previously apply. The most notable characteristic of Kentucky LLC’s is the protection of LLC assets from creditors of members. This means that the LLC must meet certain legal requirements to keep its assets separate from its owners.
It is advisable to consult a lawyer experienced in Kentucky LLC regulations to ensure that the operating agreement is compliant, complete, and tailored to suit the business.

How to Create Your LLC Operating Agreement in Kentucky

Consulting with Professionals
First and most importantly when drafting an LLC operating agreement is to consult with a professional well versed in the laws of Kentucky. Of course, the internet offers many templates and forms ready to be filled in, but this approach is not recommended. Too often draft operating agreements fail to include the appropriate provisions to protect the members of the LLC. In Kentucky, I’ve seen many situations where members of an LLC, who believed the operating agreement was in order, were surprised when their legal rights were not being met. An LLC operating agreement that is clear and specific to the needs of its members is the best way to avoid litigation later on.
Consulting with Others
Once you’ve met with a professional, the next step in the process is to sit down with all the people involved in the LLC. This meeting should go over all the concerns of the members . This process is also where major decisions are decided like: Will the business have multiple managers? What will the decision making process be (majority or super majority?) How will the distribution of profits take place? And finally, how do the members want to dissolve the LLC if it ever needs to?
After you come up with all of the above information, it’s time to review what you have with your legal professional to make sure that the terms you have decided on are permissible under Kentucky law. From there, the operating agreement can be drawn up. The operating agreement will be the one legal document that the Kentucky business will rely on for all of its internal workings.
Once the operating agreement is drafted, it is time to sign. Make sure that at least one copy of the signed operating agreement is kept in the records of the LLC. All members should receive a copy of the signed operating agreement as well.

Amending Your Kentucky LLC Operating Agreement

Amending your Kentucky operating agreement might be necessary at some point during the life of the company. Typcially, amendments happen due to changes in the ownership structure of the LLC or to accommodate additional members entering the company. A common reason for also changing the operating agreement is a change in the tax status of the LLC. Sometimes another vital reason for an amendment is due to a change in management or different ways decisions are made in the company. In other words, the Operating Agreement will include majority or supermajority voting for certain decisions.
In general, LLCs are free to create and amend their operating agreement at will. LLCs in Kentucky don’t have any legal restrictions for when they may amend their operating agreement. However, if the operating agreement does not contain a provision regarding when and how it may be amended, Kentucky law provides some guidance. According to Kentucky’s statute of limitations, KRS 275.120(3), an operating agreement may not be modified "unless the modification is made in writing and signed by all members."
The wording in Kentucky’s statute of limitations is very important. The modification does not require notarized signatures, just written signatures. Written signatures can include e-signatures as well.
In addition to a written amendment, the amended agreement should be attached to the original operating agreement. The original operating agreement should be revoked or amended in the margin of each page with a short statement like "This document is revoked by substitute Exhibit X."

Kentucky LLC Resources

Designing a suitable LLC operating agreement is an important task, and sometimes it’s helpful to get some advice before preparing your agreement. There are various resources available for LLC owners who want to do further research on the design of their operating agreement. Many of these resources are free, such as the free downloadable handbooks published by the Kentucky state government, which provide a range of information for those operating in Kentucky. Other helpful resources for Kentucky LLC owners include:
Legal Aid Society of Louisville, Kentucky Chapter 6 (LLC) (2002).
The Kentucky Chamber of Commerce
Kentucky Secretary of State: Corporations Division
If you have a greater budget for LLC advice and assistance, there are numerous professionals who can help.
Small Business Development Center (SBDC). The SBDC offers an array of services for small businesses. Teaching workshops , hosting business plan competitions, and assessing the specific needs of aspiring small business owners are just a few of their many services.
SCORE (Counselors to America’s Small Business). Like IncubatorWorks, SCORE is a member of the Small Business Administration. The group’s Louisville chapter helps people across the country work as mentors and small business counselors.
Divorce, part-time workers, death, or the expansion of a business can sometimes cause the need to amend an LLC’s operating agreement. Most agreements include the requirements for amending the document. However, if you are considering a revision, a professional will be able to guide you through the process and specify the best amendments for your business.