Yes, operating agreements are required for Kansas limited liability companies. Read on to explore this topic in greater detail.
As we wrote more than a year ago, forming an LLC is not easy. Those who have a contrary opinion can be found in places near and far, including in Facebook groups dedicated to various different causes, where this author has witnessed individuals write over and over again that an attorney is not needed to set up an LLC. Perhaps some can speak to specific examples in which this statement has proven to be absolutely true. Others can speak to specific instances in which this statement is at best misleading and at worst treacherous advice. An example of an error when setting up an LLC in Kansas that a competent attorney could help avoid is failing to have a written operating agreement.
Starting a business is exciting. Founders think about the thrill of independence, the potential upside of the company’s revenues and profits, the impact of the business on the community, and possibly even an eventual transition of the business to the next generation, setting the family up for generational wealth. Sometimes this excitement has the effect of propelling swift action, like what happens upon the firing of a starter pistol at the beginning of a track and field competition. The problem with treating the business formation process like a race is that certain aspects of the process aren’t given their due attention. Oftentimes, it is the name of the business that is neglected; other times, it is the operating agreement, the internal contract of the Kansas limited liability company adopted by the member or members (and possibly the manager or managers, too) of the business, an agreement analogous to a corporation’s bylaws or a partnership’s partnership agreement.
When a new limited liability company is formed in Kansas, neither Uncle Sam nor his state-based counterpart has his hand out in expectation of receiving a copy of the company’s operating agreement. This allows entrepreneurs to speed through the business formation process and, in some cases, to forget that having a written operating agreement is crucially important. Having an inadequate operating agreement, or an ambiguous operating agreement, isn’t uncommon either, but one may or may not be surprised to learn that some limited liability companies—even presently successful ones—do not have written operating agreements at all. Yes, this law firm has been involved in multiple situations in which local companies are entirely devoid of written operating agreements altogether.
When forming an LLC in Kansas, for better or for worse, organizers are not required to supply the Kansas Secretary of State’s Office with a copy of the company’s operating agreement or even acknowledge that one exists or will exist. While many probably appreciate the privacy and time savings this affords, others are woefully uninformed that an operating agreement is actually required under Kansas law. A section of a Kansas statute that pertains to Kansas limited liability companies, K.S.A. § 17-7673(c), states that “[a]n operating agreement shall be entered into or otherwise existing either before, after or at the time of the filing of the articles of organization[.]” At least one Kansas court has construed this statute in dictum as requiring an operating agreement. Leggett v. Hontz, No. 123,906 at *4 (Kan. Ct. App. 2022) (unpublished memorandum opinion, which, per Kan. Sup. Ct. R. 7.04(g), is not binding precedent or favored for citation). The aforementioned statute, which is currently in effect, and aforementioned case, decided in this year of 2022, are sufficient authority for this attorney to conclude that operating agreements are required for Kansas LLCs. Additional authority lends further support to this conclusion. A law journal article published by a local, Kansas law school states that “every LLC must have an operating agreement.” Evan Hathaway, What is the Kansas Series LLC and Why Should You Care?, 59 Washburn L.J. 519, 521 n.20 (2020). In a subsequent footnote, the same article states that “each new LLC requires an independent operating agreement[.]” Id. at 521 n.23.
There are two primary camps in which Kansas limited liability companies without operating agreements might fall. The first camp is made up of those who do not know that operating agreements are required in the state of Kansas. These people might not have researched or been apprised of the current law, might have come across inaccurate information, or might have simply assumed that the Kansas Secretary of State’s Office would have asked for or about an operating agreement were it a legal requirement. Hopefully, this article limits the members of this camp. The second camp is composed of those who make the choice to not have an operating agreement. These people perhaps do not want to pay for the front-end cost (be it time or money) of arriving at an operating agreement or do not otherwise find one to be worthwhile; alternatively, members of this camp might actually have intentions of formulating an operating agreement at some point in time, just not now. Attrition of this second camp is also a hoped-for byproduct of this article.
Asking a handful of Kansas attorneys for their respective views as to whether or not operating agreements are required for LLCs in Kansas may result in the receipt of an equal amount of different opinions. Such is often the experience working with practitioners of an artful rather than scientific approach, a widespread phenomenon across the legal profession. Adding to the variety of opinions in connection with the required nature of operating agreements for Kansas LLCs might also be a relatively recent change in law. A look back into the not-so-distant past shows that, as of 2013, the Kansas statute on point read much differently: “An operating agreement may be entered into either before, after or at the time of the filing of the articles of organization[.]” K.S.A. § 17-7673(c) (2013). Perhaps “much” is a bit of an exaggeration, but the subsequent substitution of the word “shall” (typically mandatory) for the word “may” (typically permissive) is legally significant.
Also adding to the variety of opinions as to whether operating agreements are required for LLCs in Kansas might be the statutory definition of an operating agreement itself. Per K.S.A. § 17-7663(k), an operating agreement means “any agreement, whether referred to as an operating agreement, limited liability company agreement or otherwise, written, oral, or implied, of the member or members as to the affairs of a limited liability company and the conduct of its business.” This definition certainly permits an operating agreement to come in many forms. It is the oral form that potentially causes some to believe that an operating agreement isn’t required: the assumption might erroneously be that an operating agreement is necessarily a written document (and, per the statute, a written document isn’t required).
Perhaps the greatest contributor to the multitude of opinions one might hear when asking whether or not Kansas LLCs must have operating agreements goes back several decades. The Kansas Limited Liability Company Act, in existence back in the 1990s, used to require an LLC to have an operating agreement. K.S.A. § 17-7613 (repealed 2000). The Kansas Revised Limited Liability Company Act, made effective January 1, 2000, replaced the Kansas Limited Liability Company Act. Edwin W. Hecker, Jr., The Kansas Revised Limited Liability Company Act, The Journal Nov.-Dec. 2000 at 16. According to Professor Hecker, the requirement (of prior law) that an LLC have an operating agreement was eliminated by the Kansas Revised Limited Liability Company Act. Id. at 20. One wonders what happened between 2000 and 2014 to cause the law to swing back the other way. More research could be performed at a later date to possibly find that answer.
Irrespective of a given lawyer’s interpretation of what the law may state or imply, and the numerous statutory changes that have occurred over the last 20-25 years, a statement unlikely to cause disagreement or varying opinions among business attorneys is this: “Every Kansas LLC should have an operating agreement, and that operating agreement should be in writing.” Some attorneys might argue that this statement does not apply to all limited liability companies, and, of course, they stand a chance of being right; however, as of the date of this blog article, it is the opinion of this law firm that operating agreements are required for Kansas limited liability companies. As a practical matter, operating agreements may need to be in writing for the purposes of opening a bank account, raising equity capital, or obtaining a loan, actions extraordinarily difficult to sidestep for the majority of businesses, to say nothing of the unfortunate legal consequences when mixing the spoken word and the frailties of human memory.
Whether a Kansas LLC is owned by merely one individual, a husband and wife, or a handful or two of unrelated people, not having a written operating agreement is likely a mistake. The lack of one can lead to internal disputes between or among members, the application of potentially undesirable default rules, an inadequate business succession plan, or even the finding of personal liability under an alter ego or veil piercing theory.
If your to-be or existing limited liability company would like its operating agreement written, reviewed, or amended, Kincaid Business & Entrepreneurial Law, LLC ® might be able to help. This firm has drafted, reviewed, revised, amended, and negotiated numerous operating agreements for Kansas and Missouri limited liability companies. Please feel free to conveniently schedule with us here if an initial or other consultation might be desirable in connection with an operating agreement project. You may also wish to read more about associated areas of law, business law, trademarking business names, drafting or reviewing business contracts, and forming LLCs, on our website. For content about some of the difficulties or complexities encountered when forming an LLC, you may wish to read the following blog article: “Why Owning an LLC in Your Own Name May Be a Big Mistake.”
Matthew T. Kincaid