Why You Would Need an Operating Agreement for Your Hawaii LLC

We have previously discussed why using the generic Department of Commerce and Consumer Affairs Business Registration Division’s Limited Liability Company Articles of Organization form may be a mistake. Here we discuss why you need a separate Hawaii Operating Agreement.

Under Hawaii Revised Statutes Chapter 428 if you do not have a separate Operating Agreement you are stuck with the default rules that are in Chapter 428. The problem is the default rules are inadequate for a lot of Hawaii residents, especially when it comes to a member leaving the Hawaii LLC.

Significant Rights & Rules to Consider in Your Hawaii LLC Agreement

The statutory default rules do not discuss what most people would consider desirable departure rules in a Hawaii Limited Liability Company. For example, my standard Operating Agreement provides for a “Right of First Negotiation” so that if any member desires to transfer his or her membership interest they have to first offer it to the LLC. That way the LLC can purchase that membership interest and avoid having strangers join the LLC.

In addition, as a backup I also have a provision that gives the LLC the “Right of First Refusal” to purchase the selling interest upon the price and terms that a third party is offering to purchase the membership interest. I also add language that states if the LLC does not exercise the right to purchase the seller’s membership interest, the other members can purchase that interest.

These are all important rights that most Hawaii residents would want to have as it allows the others in the LLC to keep that interest in the original membership group and not allow outsiders into the Hawaii LLC.

Some Hawaii residents want to make the Operating Agreement even more restrictive by providing that you can only sell your membership interest to other family members. Others want to specify that a transfer to that person’s revocable living trust is not a “transfer” that triggers a sale to the other members.

Finally, some business people want to go the extra step to enter into a separate Buy-Sell Agreement which would describe what happens if a member passes away or is deemed incompetent. A lot of business people do not want the spouse of their deceased co-worker to have a say in what happens to the business and just want to buy the spouse out.

Head Off Future Issues & Disagreements in Your LLC

As you can see having a Hawaii Operating Agreement is incredibly important to a lot of people. My form is 27 pages long and all rules are contained within that document, versus having to read the entire Chapter 428.

Please contact me for help in forming your Hawaii LLC. Save yourself time, money, and headaches.

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