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Why You Need An Operating Agreement

Operating agreements are optional but crucial documents. Entrepreneurs looking for the perfect business structure to shield their assets from their business liabilities may choose to form a limited liability company (LLC). Whatever format you choose, you will need to build your company on paperwork such as an operating agreement. LLCs use them to provide a framework for how the company’s financial and operational decisions will be taken. It encompasses the provisions, regulations, and rules that the company will live by. It even outlines how disputes will be resolved. The operating agreement provides everyone with the governing principles around which the company will be organized. It is tailored to meet the unique needs of the business. Once signed, it binds all the members of the LLC.

Benefits of Having an Operating Agreement

An operating agreement adds a further layer of protection for your assets as well as those of the other members of the LLC. Without an operating agreement, your LLC may be so close in form to a sole proprietorship that your liability is more significant than it should be.

Operating agreements serve as a point of reference for any verbal agreements. You see, even among the best of friends, there are misunderstandings, miscommunication, and even failures of memory. To avoid unnecessary conflicts, you need an operating agreement so that everything is clarified. There is something to refer to when there is any conflict over operations and other business matters.

Each state has default rules that govern an LLC. If you do not have an operating agreement, you are subject to these default rules. However, these rules are very general because they have to apply to a wide array of businesses, such that they leave you with less protection than if you had drafted your operating agreement. The default rules may even go against everyone’s interests, making it even more important to have your operating agreement in place. However, you do not have absolute freedom in crafting your operating agreement: it must still conform to state and federal law.

Some lenders may only want to lend to your LLC if it has an operating agreement in place. So, if you do not have an operating agreement, your application for a loan will be denied.

Finally, an operating agreement allows you a platform to plan for succession. In it, you can state who will run the business if you were to die or become incapacitated. This will ease the stress on your family and colleagues in the event of a tragedy.

You can hire a business attorney to draft an operating agreement for your LLC. This will ensure that your operating agreement is customized to your unique needs.

The business attorney you use should be well versed in your state’s laws as they apply to LLCs. They may even offer suggestions as to what default state provisions you should think about altering.

Or, you may use a template operating agreement and alter it to suit your needs.