A Hawaii LLC Operating Agreement, putting it in plain terms, functions like your LLC's tailor-made scheme providing a transparent layout for how it operates. Imagine we're having a casual chat over coffee and I'm explaining it as your bespoke catalog setting the standards for managing your business, detailing matters like allocation of ownership, the sequence of decision-making, and plans for the transition of leadership.
This agreement, directed by Hawaii's LLC regulations, lays out the space where you will encompass pivotal aspects such as roles of members, the chain of decision making, and modes of sorting out disagreements. Ultimately, it's like the satellite navigation for your business, setting a clear course built to head off potential misunderstandings throughout your entrepreneurial journey.
No, it's not legally required in Hawaii under § 428-103. Single-member LLCs need an operating agreement to preserve their corporate veil and to prove ownership. And multi-member LLCs need one to help provide operating guidance, determine voting rights and contributions.
Read on to learn more about Hawaii operating agreements, including:
Here are some key components that are typically included in a Hawaii LLC operating agreement:
Let's break down the usual sections and provide some explanation for each to guide you.
By now, you should know your LLC's name—the one you used when filing your LLC formation documents. In addition, it's crucial to explain your LLC's purpose. Keeping your statement general leaves the door open for new ventures without having to refile.
OPERATING AGREEMENT of [COMPANY NAME]
This operating agreement is adopted as of [Date] (the “Effective Date”), by [Member’s Name] , an individual and the sole member (the “Member”) of [Company Name] (the “Company”).
The Member hereby adopts this agreement as the operating agreement of the Company, which agreement sets forth the entire understanding of the Member regarding its subject matter and supersedes all prior understandings and agreements regarding its subject matter.
The purpose of the Company is [ Company Purpose] , and the conduct of other activities as may be necessary or appropriate to promote the stated purposes, and to engage in any other lawful business or activity for which a limited liability company may be organized under the Act.
This section indicates whether your Hawaii LLC is member-managed or manager-managed. It also outlines each member's rights and responsibilities, such as capital contributions, voting rights, and management structure. While it may seem unnecessary for single members, this step is crucial for establishing your single-member LLC.
The business and affairs of the Company will be managed by the Member. The vote, action, decision, or consent of the Member will constitute a valid decision of the Member and the Company. The Member may appoint one or more officers (including the Member, if the Member is an individual) who will have such powers and authority to act on behalf of the Company granted to them by the Member.
The business and affairs of the Company will be managed by the manager of the Company and any successor thereto appointed by the Member, which manager may also be referred to as the Company’s president (the “Manager”). The initial Manager will be [Manager Name] , who will serve until the Manager’s death, removal by the Member (for any reason or no reason), or resignation. The Manager will have the right and authority to manage the affairs of the Company and make decisions and take action with respect thereto without further approval or consent of any kind by the Member. Except as otherwise required by this agreement and in lieu of any limitations set forth in [State Name] ’s laws for limited liability companies (the “Act”), the Manager will be solely responsible for and is hereby authorized to manage and operate the business of the Company. Except to the extent that the authority of the Manager is expressly limited by the Member, the vote, action, decision, or consent of the Manager will constitute a valid decision of the Manager and the Company.
Your registered agent is the person responsible for receiving and handling essential documents on your company’s behalf. Although some LLC operating agreements include this, it's optional since you list it on the formation documents filed with your organizing state.
The Company’s registered agent in State is: Registered Agent Name , Address . The members may designate other registered agents or offices at any time in this state or, if necessary, in other states.
Consider your LLC's term as its lifespan, as described in your formation documents. Although many business owners form LLCs intending to operate them indefinitely, you also have the option to specify a fixed period or end date for your Hawaii LLC.
Typically, LLCs are considered "perpetual" by default, meaning they can exist as long as you want. Here's a sample provision for a perpetual duration:
The duration of the Company will be perpetual.
Capital contributions are the funds, property, or services you provide to your LLC to kickstart its operations. For single-member LLCs, capital contributions can come entirely from you, allowing you the flexibility to decide how much you’d like to invest in your business.
Documenting your capital contributions correctly is essential, as it helps paint a clear picture of your business's financial structure and provides valuable details for tax purposes.
The Member’s capital contribution(s) to the capital of the Company for the Member’s membership interest in the Company will be reflected on the books and records of the Company.
The members have made or shall make the contributions of cash, property or services to the LLC as set forth on Exhibit A attached
The indemnification clause in your LLC's Operating Agreement works as a safety net, protecting members from certain costs tied to legal issues arising from their work for the company. This means that the LLC will cover legal fees or damages if a member faces a lawsuit related to their duties for the business.
The agreement should clearly define when and in which circumstances the LLC will provide this protection, along with any exceptions. Indemnification typically doesn't cover intentional wrongdoing or serious negligence. Therefore, tailoring these terms to your business's specific risks is crucial to ensure adequate protection.
The Member, the Manager, the officers, and the organizer of the Company and their respective affiliates, stockholders, members, managers, directors, officers, partners, employees, agents, trustees, and representatives (individually, an “Indemnitee”) will be indemnified by the Company against any and all losses, claims, damages, liabilities, expenses (including legal fees and expenses), judgments, fines, settlements, and other amounts arising from any and all claims, demands, actions, suits, or proceedings, civil, criminal, administrative, or investigative, in which the Indemnitee may be involved, or threatened to be involved, as a party or otherwise by reason of the Indemnitee’s status as any of the foregoing, which relates to or arises out of the Company or its assets, business, or affairs, if in each of the foregoing cases (A) the Indemnitee acted in good faith and in a manner the Indemnitee believed to be in, or not opposed to, the best interests of the Company, and, with respect to any criminal proceeding, had no reasonable cause to believe the Indemnitee’s conduct was unlawful, and (B) the Indemnitee’s conduct did not constitute gross negligence or willful or wanton misconduct. The termination of any action, suit, or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere, or its equivalent, will not, of itself, create a presumption that the Indemnitee acted in a manner contrary to that specified in clause (A) or (B) above. Any indemnification under this section 5 will be made only out of the assets of the Company, and the Member will not have any personal liability on account thereof.
Your Hawaii LLC can be taxed in one of four ways: as a sole proprietorship, partnership, S corporation, or C corporation. The way your LLC gets taxed depends on the number of members and the tax status your business selects with the IRS.
Include tax status sections in your operating agreement, discussing your chosen tax status, how you can change it, and how you'll handle tax returns and allocations (when applicable). This helps your LLC have a plan for managing business finances, including profits, losses, dividends, and taxes, providing a clear roadmap for handling tax-related issues.
The Company will be disregarded for federal and state income tax purposes. The admission of one or more additional members, however, will cause the Company to be recognized for tax purposes, and to be taxed, as a partnership.
The Member acknowledges that the Company has elected to be taxed as a corporation for federal tax purposes pursuant to the regulations currently in effect under Section 7701 of the Code, and to be taxed as an electing small business corporation under the provisions of Subchapter S of the Code. Notwithstanding such tax treatment, the Member acknowledges and agrees that the Company will be a limited liability company, for state law purposes, under the provisions of the Act, the Articles of Organization, and this operating agreement.
The Member acknowledges that the Company has filed or will timely file a Form 2553 (Election by a Small Business Corporation) with the Internal Revenue Service and that the election made pursuant to the filing is or will be in force and effect covering all periods since the date of this operating agreement. Except as otherwise provided in this operating agreement, during the term of this operating agreement and the continuation of the Company’s “S” corporation election under Section 1362 of the Internal Revenue Code, no Member shall take any action which would cause the revocation or termination of the Company’s “S” election (under Section 1362(a) of the Internal Revenue Code) and any attempt to take such an action will be null and void and without effect. Without limiting the foregoing, and notwithstanding any provision hereof to the contrary, any transfer or attempt to transfer any membership interest to any of the following will be null, void, and without effect:
(a) a person whose ownership thereof would cause the Company to have a number of Members and assignees of membership interests (shareholders of an “S” corporation) greater than the number permitted by Section 1361(b)(1)(A) of the Internal Revenue Code;
(b) an individual who is not a United States citizen or resident;
(c) a trust (or the trustee thereof) which fails to satisfy the requirements of Section 1361(c)(2)(A) or 1361(d) of the Internal Revenue Code;
(d) a corporation; and
(e)any other entity whose ownership would cause the termination or revocation of the Company’s tax status as an “S” corporation.
This clause indicates when your LLC will distribute the income it generates. For single-member LLCs, it's not that crucial. However, multi-member LLCs should specify when, under what prerequisites, and how distributions will occur.
As the sole member of the LLC, the Member is entitled to all profits of the LLC and is responsible for all its losses. Profits and losses shall be determined annually and will be allocated to the Member's capital account. Distributions of cash or other assets will be made at such times and in such amounts as deemed appropriate by the Member.
What if you need to change any term in your LLC? Simply follow your LLC amendment clause. For single-member LLCs, it's quite straightforward. For multi-member LLCs, be sure to consider voting percentages and what's required to amend the operating agreement.
This agreement and the articles of organization of the Company may not be altered, modified, or changed, and no provision of this agreement may be waived, except by an amendment or waiver, as applicable, approved by the Member.
LLCs are typically not required to follow corporate formalities. However, in some cases, not following formalities could jeopardize maintaining your corporate veil. So, it's a good idea to include a waiver of all formalities in the operating agreement.
The failure of the Company or the Member to observe any formalities or requirements relating to the exercise of its powers or management of its business or affairs under this operating agreement or the laws in the state in which the Company is which govern limited liability companies will not be grounds for imposing personal liability on the Member for liabilities of the Company.
This section outlines the plan for when things don't go as expected. It guides you on how to dissolve your LLC and who will maintain control if your involvement in the LLC ends prematurely.
Upon the occurrence of any event which terminates the continued membership of the Member in the Company, the Company will not be dissolved, and the business of the Company will continue. The Member hereby specifically consents to such continuation of the business of the Company upon any such event. The Member’s legal representative, assignee, or successor will automatically become an assignee of the Member’s interest and will automatically become a substitute Member in place of the withdrawn Member.
The effective date of your operating agreement is when it becomes active—or when it "takes effect."
No—unlike your Articles of Organization (or Certificate of Formation, depending on your home state), your operating agreement is an internal document stored in your company's records. Simply sign it and keep a copy accessible for future reference.
It's natural for small business owners to aspire for growth. If you're in that exciting position, ready to welcome another member to your Hawaii LLC, you'll need to revise the paperwork in line with the agreement between you and the new partner. Chances are, you'll need to create an entirely different agreement, as a multi-member operating agreement differs significantly from a single-member operating agreement.
